Salvage auction operators busy after hurricanes, new car sales beat expectations

Salvage auction operators have been rapidly recovering the nearly 200,000 vehicles totaled by Hurricane Harvey, and they should start to enter the market between the middle of the fourth quarter and through the first quarter of 2018, equity analysts said.

But the operators haven’t been the only ones busy after the storms as automakers’ sales exceeded expectations in September.

LKQ Corp., a distributor of vehicle replacement parts and a leading provider of alternative collision replacement products, purchases about 300,000 vehicles for salvage and recycling annually, and the company is expected to benefit from an improved available inventory as a result of the “record storm season,” according to Bret Jordan and David Kelley, equity analysts for Jefferies.

The vehicles impacted by Hurricane Harvey include “a mix skewed to high value” pickups and SUVs “with less severe fresh water damage,” and LKQ can expect “a favorable supply environment” by late 2017, according to Jordan and Kelley. The business experienced some disruption because of collision shop closures as a result of the storms, but this is expected to be offset by the increased volume and supply related to the storm.

Hurricane Harvey, which initially made landfall along the Gulf Coast on Aug. 25, impacted August vehicle sales, but incoming sales data for September shows “a very strong surge” in demand for light vehicles within the Houston designated market area, according to industry analyst IHS Markit. Hurricane Irma, which made landfall in Florida on Sept. 10, also impacted sales, but demand there “appears to be recovering at a slower pace.”

Hurricane Harvey is expected to be the second-costliest U.S. hurricane since 1980, while Hurricane Irma should narrowly miss the top five, according to a Tuesday (Oct. 3) report from IHS Markit — Harvey and Irma Recovery One Month Later. The damage estimate for Harvey is between $60 billion and $100 billion, and Irma, with $30 billion in damage, should rank sixth.

“In regards to new light vehicle sales, auto dealers in the areas affected by Harvey and Irma will realize a surge of replacement demand, which will boost overall U.S. sales levels through the first quarter of 2018,” said Chris Hopson, principal analyst — automotive for IHS Markit.

The Houston designated market area is the 10th largest in the United States and has had about 215,000 new vehicles registered there so far this year — a 2.1% share of the total number of vehicles registered nationwide.

According to Wards Auto, U.S. vehicle sales rose to a seasonally adjusted annual rate of sales of 18.5 million units in September, from 17.6 million in the same month in 2016. In August, the sales rate was 16 million. Almost 1.52 million vehicles were sold in September, and the daily sales rate increased 1.9%, from the same month in 2016. Previously, Wards Auto projected sales of 1.44 million vehicles and a seasonally adjusted annual rate of sales of 17.5 million for September.

October was expected to be the turning point for the market, instead of September, “as consumers replace vehicles lost due to natural disasters and automakers push sales to clear out excess model-year ‘17 stock,” according to Wards Auto. “However, the winds have already begun to turn, and September sales will be significantly higher than originally expected.”

Between January and September, sales have fallen 1.9% to 13 million vehicles, from the same period in 2016.

Jeff Williams, president and chief financial officer of America’s Car-Mart, said the Bentonville-based business usually does well when new car sales are good because of optimism and trades, but he expects “new car sales to be flattish as we move forward.”

“I’m not as optimistic as some,” he said.

Shares of Car-Mart (NASDAQ: CRMT) rose 20 cents or 0.49% to close at $41.25 on Tuesday (Oct. 3). In the past 52 weeks, the stock has ranged between $47.75 and $30.20.