By Ian Salisbury

Wall Street has high hopes for Carvana, but another automotive retailer, Group 1 Automotive, might be a better bet for investors.

Shares of online car retailer Carvana rallied more than 6% Tuesday, following a news report that quoted CEO Ernie Garcia arguing tariffs could boost used car sales. Wall Street analysts are also optimistic: They expect the company's operating profits to more than double in 2025, and jump another 25% in 2025.

But Carvana's high share price already reflects that optimism. Shares currently trade at about 58 times those expected 2025 earnings. That requires a lot to go right in an environment that is still highly uncertain -- just Monday President Donald Trump said he would lower the tariff rate on Chinese imports for three months to allow time for negotiations.

Investors looking to bet on auto dealers might do better with another company that recently got some good news -- and carries a much cheaper valuation. Shares of Group 1 Automotive rallied 2.3% to more than $453 Tuesday after Citi Research analyst Michael Ward raised his target price on the stock to $495 from $463.

Based in Houston, Group 1 Automotive owns more than 330 auto franchises in the U.S. and U.K., a total it has grown in recent years through steady acquisitions. Wall Street sees relatively modest profit growth: 3.8% in 2025 and 6.6% in 2026. But shares trade at less than 11 times 2025 earnings.

About 50% of Group 1's revenue comes from new vehicle sales, compared with 33% for used vehicles, according to research firm CFRA. (The rest is from business lines like parts and finance.) If Trump's tariffs steer shoppers toward used cars instead of new ones, that could cut into Group 1's biggest sales market.

Still, Citi's Ward points out, about 25% of Group 1's revenue comes from its operations in the U.K., where the Trump administration's plans will make no difference.

Ward also thinks Group 1's price-to-earnings multiple could expand as investors' memories of the Covid-era industry's dislocations begin to fade.

"Dealer stocks are valued at a 15% discount to pre-Covid levels despite better-than-expected financial performance during and after the crises," he wrote. "Profit levels have improved, and consolidation has accelerated, providing an opportunity for double-digit revenue growth at GPI in 2025-26."

Write to Ian Salisbury at ian.salisbury@barrons.com

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May 13, 2025 15:05 ET (19:05 GMT)

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