Take a pass on E Automotive, says Eight Capital

Continued gloomy days for the auto industry are likely to keep hindering progress for E Automotive (E Automotive Stock Quote, Charts, News, Analysts, Financials TSX:EINC), according to Eight Capital analyst Christian Sgro, who reviewed the company’s latest quarterly numbers in an update to clients on Wednesday.

E Automotive, an online wholesale auction and marketplace platform for the auto industry, released its third quarter financials on Tuesday, showing total revenue up 46 per cent year-over-year to $28.8 million, which was below analysts’ consensus estimate at $31.9 million as well as being under Eight Capital’ call at $33.0 million. On adjusted EBITDA, the Q3 was a loss of $11.7 million, which was also a miss compared to the Street’s negative $9.7 million and Eight Capital’s $9.4 million. (All figures in US dollars except where noted otherwise.)

“Despite the challenging macro environment affecting demand for vehicles and tight inventory conditions that have been impacting transaction volumes, we grew revenue organically as dealers continue to seek an easy-to-use digital platform that enables them to profitably and effectively manage their inventory,” said President and CEO Jason McClenahan in a press release.

E Auto said vehicles transacted over the quarter were up 16.5 per cent to 48,914, while marketplace participants grew by 43.5 per cent to 12,994. On the M&A front, the company entered into non-binding, finalized term sheets over the quarter related to an $85 million transaction to acquire multiple physical auctions in the US. Meanwhile, management said it was taking restructuring steps to deal with the realities of today’s tough auto industry, including focusing on its Digital-Meets-Physical strategy, targeting specific regions across North America and delivering new value-added products.

Commenting on the quarter, Sgro called the results a “negative” impact on E Auto and noted the 48.9K in volume transacted was under his estimate at 56.9K, while average price per vehicle at $14.2K was under his expectations at $15.5K.

The analyst said used vehicle prices have continued to contract in recent months from their highs as constrained supply conditions begin to abate and demand slows given the weaker macroeconomic picture. 

“Affordability is a rising concern, as increasing rates have forced buyers to curtail spend and delay vehicle upgrades. Q4/22 has seen an uptick in new vehicle sales, signalling increased demand at softer prices,” Sgro wrote.

With the update, Sgro maintained a “Neutral” rating on EINC and C$8.00 target price, which at the time of publication represented a projected one-year return of 84 per cent.

“EINC reported Q3/22 financials behind consensus estimates, facing the same automotive industry headwinds seen by key US peers. Management emphasized an accelerated path to profitability, announcing restructuring plans with optimization efforts to improve unit economics,” Sgro wrote.

“The company continues to digitize its US footprint to gain share and position for improving macro conditions. In the meantime, we see continued top-line and gross margin pressures as volume and pricing headwinds stabilize,” he said.