Merrill Lynch: With Strong Car Sales, Car Dealers Have Huge Upside

Group 1 Automotive Inc. (NYSE: GPI) owns and operates 152 auto dealerships, 193 franchises and 37 collision centers in the United States, the United Kingdom and Brazil that offer 34 brands of automobiles. Through its dealerships, the company sells new and used cars and light trucks; arranges related vehicle financing, service and insurance contracts; provides automotive maintenance and repair services; and sells vehicle parts. The company reports second-quarter earnings on July 24. Investors are paid a 0.8% dividend. Merrill Lynch has a gigantic $107 price target, and the consensus is much lower at $83. The stock closed Friday at $81.84.

Lithia Motors Inc. (NYSE: LAD) offers 30 brands of new and used vehicles in more than 100 stores, as well as financing and parts and service. The company tends to focus on the used car segment, which carries higher margins than the new car segment, and has a geographic focus toward the Northwest and western United States. The company has shown solid earnings growth, and shareholders may cash in when they report earnings on July 23. Investors are paid a very small 0.7% dividend. The Merrill Lynch price objective is $105, and the consensus target is $98.40. The shares closed Friday at $91.42.

Penske Automotive Group Inc. (NYSE: PAG) is the second largest auto retailer in the nation and another well-known dealership name for investors to consider. It is an international transportation services company operating automotive dealerships, commercial vehicle distribution and car rental franchises principally in the United States, Western Europe, Australia and New Zealand. This may offer investors more diversity that just car sales, and Roger Penske was a Detroit legend. The company will report on July 30. Investors are paid a 1.6% dividend. Merrill Lynch has a $58 price target and the consensus is at $50.78. The stock ended the week at $48.89.

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Sonic Automotive Inc. (NYSE: SAH) rounds out the top dealerships investors can buy before earnings. Focused mostly on the fast growing Southeast, Southwest and Texas, the company suffered a lackluster first quarter as bad winter weather slowed store traffic and sales. The Merrill Lynch analysts are optimistic that the second quarter was much stronger. The company will report earnings on July 22. Investors are paid a tiny 0.4% dividend. The Merrill Lynch price target is $39, and the consensus is lower at $28.80. Sonic was trading Friday at $26.37.

Merrill Lynch is clearly much more bullish on the dealerships than the rest of Wall Street. Given the gigantic quarter that GM posted, it is easy to see why. Investors looking to add any of these top stocks to their portfolio have to at least consider buying before the earnings are released.