Check The Engine: Used Car Pricing Pressure Continues

Hertz Global Holdings, Inc (NYSE: HTZ) is the latest company to comment on the deterioration of the auto market in 2017.

According to Hertz, the company’s vehicle depreciation increased by 15 percent in the first quarter of the year. In the company’s earnings presentation, Hertz projected a 3 percent decline in used car prices in 2017.

However, with new vehicle sales time and dealer incentives both at their highest levels since 2009 and a sharp decline in auto credit quality in recent months, Height Securities' Edwin Groshans believes used car prices could take a much more severe hit in coming years that the industry is expecting.

“Pressure on used car prices from higher interest rates, credit normalization, and off-lease volumes will likely take the help for the balance of 2017 and pressure used vehicle prices at a pace that exceeds industry expectations,” Groshans explains.

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Black Book reports that from April 29, 2016 to May 5, 2017, 14 out of 22 used vehicle types witnessed price declines of greater than 18 percent.

Auto lenders such as Wells Fargo & Co (NYSE: WFC), TCF Financial Corporation (NYSE: TCF) and Fifth Third Bancorp (NASDAQ: FITB) have already announced plans to tighten their lending standards, but Groshans believes subprime auto lenders have nowhere to hide.

“The combination of lower used car auction prices and weakening credit quality will manifest in the operations of auto finance companies with subprime lending concentrations,” Groshan says.

Height securities names the following stocks as the companies with the most exposure to subprime auto loans:

• Credit Acceptance Corp. (NASDAQ: CACC)
• Santander Consumer USA Holdings Inc (NYSE: SC)
• Ally Financial Inc (NYSE: ALLY)
• Capital One Financial Corp. (NYSE: COF)