Joe Reddell
by Breakingviews
A strike at Detroit automakers could hamper Carvana’s (CVNA) turnaround. Shares of the $10 billion used-car supplier have risen nearly 10-fold this year as profitability improves.
Partly because it pays less Acquire used cars and list them on the market. Industry-wide shutdowns could reverse this trend, risking a repeat of the devastation caused by Covid-19, but there is no silver lining.
Automakers Ford (F) , General Motors (GM) and Stellantis (STLA) have just one week left to sign a new contract with their 150,000 unionized workers. The United Auto Workers voted last month to authorize a strike if a collective bargaining agreement was not reached by Sept. 14.
This jeopardized Kavanagh’s nascent momentum.The company’s gross profit per vehicle sold more than doubled in the quarter ended in June from a year earlier, helping boss Ernie Garcia III Reported positive EBITDA for the first time in nearly two years.
Part of this growth is due to the growing gap between the wholesale and retail prices at which Carvana purchases vehicles. Car auction company Manheim said last month that wholesale prices fell 12% in July from a year earlier.
But data from Cox Automotive shows that the Detroit Three accounted for 43% of U.S. new car sales last year. If this goes away, even briefly, buyers may be forced into the secondary market, causing wholesale prices to rise again.
Garcia has been here before. Early pandemic shutdowns and a shortage of new cars prompted buyers to flock to Carvana’s online marketplace, pushing its valuation to more than $64 billion at its peak.
Retail sales more than doubled in 2021 year over year. But wholesale prices are also up 62% from pre-pandemic levels, reaching highs in early 2022, causing Carvana’s gross profit per sale to halve during the same period.
When demand finally eased, the company was stuck with hard-to-sell and expensive inventory. From August 2021 to the end of 2022, the company’s stock price plummeted 99% as it struggled to restructure its heavy debt load.
Strikes by autoworkers have brought similar pain, but gains in the lockdown era have been minimal. Prices remain well above pre-pandemic levels, and higher interest rates are making auto loans more unaffordable.
That has put pressure on Carvana’s retail vehicle sales, which fell 34% year over year in the June quarter. It also limits the company’s ability to raise retail prices.
Granted, the strike may not last as long as the pandemic has, and negotiations are picking up pace. But UAW President Shawn Fain appears ready for a fight. Garcia’s road to comeback could get longer.
Background news
United Auto Workers members voted on Aug. 25 to authorize a strike at General Motors, Ford Motor Co. and Stellantis if a new labor deal is not reached by a Sept. 14 deadline.
The authorization was approved by 97% of members. UAW President Shawn Fain said the union does not plan to extend the deadline. According to a Reuters report on September 7, the United Auto Workers union made a counteroffer to Ford after Ford’s initial offer failed to meet the union’s demands.
Carvana said on July 19 that second-quarter adjusted EBITDA was $155 million, the first time it reported positive margins since the third quarter of 2021.
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Editor’s note: Summary points for this article were selected by the Seeking Alpha editors.
