Seeking Alpha
, ValuePlays (12 clicks)
Hedge fund manager, long/short equity, value
Profile| Send Message|
( followers)  

Let's put this the nicest way possible, it now is obvious drug testing is not happening at UBS (NYSE:UBS).

First the news:

UBS bank downgraded the Fort Lauderdale-based company’s stock to "sell" from "neutral."

An analyst report by the Zurich, Switzerland-based financial services company said: “We believe that AutoNation continues to face liquidity concerns, especially in the third quarter of 2009, when its debt covenant thresholds change.”

UBS analyst Colin Langan wrote in his report that “AutoNation is currently trading at 19 times our revised 2009 earnings per share estimate, above its historic average, despite its limited liquidity."

The UBS downgrade came one day after AutoNation announced a new program to cover customer auto loan payments for six months if the customer suffers a layoff or involuntary job loss.


AutoNation (NYSE: AN) said Wednesday it will cover customer payments for six months in the event of job loss. The program starts Thursday in 33 South Florida dealerships. It’s similar to one announced by Hyundai last year, in which the Korean automaker allows people to return cars if they lose their jobs.

Customers must have been employed for at least 30 days and apply for unemployment benefits. The benefit does not start until the car has been owned for three months, according to an advertisement.

What does it all mean?

Well, for UBS to be remotely accurate, annual vehicle sales would have to:

  1. Drop below the 9 million annual units they are at now
  2. AutoNation's cost cutting program that is still ongoing would have to come to a complete stop
  3. The "job guarantee" program referenced above, the one which Hyundai has called a "home run" would have to be a flop (Hyundai has seen sales fall by the lowest amount, due to the program)
  4. Fewer dealerships would close, thereby eliminating the market share gains AutoNation is currently seeing
  5. The recently enacted TALF would have no effect on the industry, despite that fact it already has.

    Let's not forget, Mr. Langen is predicting the U.S. auto market out to Q3 this year. It just is not possible to do that at this point with any degree of accuracy. There are so many material events currently unfolding designed to free up the credit necessary for the market to grow that making an assumption about what will happen almost 30 weeks from now is just irresponsible.

    There is significant postponed demand right now. A friend of mine who sells cars told me this weekend that loans that were a blanket "no" a month ago are now getting a serious look and more are being approved. The present 6 month backlog of buyers out there is starting to show signs of letting loose.

    Let's look at UBS's history with AutoNation: (Click to enlarge)
    They initiated it with a "neutral" in Jan 2008 and then as the economy and credit markets fell off a cliff they maintained the "neutral". As consumer credit totally froze in Q4 2008 and up through Jan. 2009, UBS was still "neutral". But now that the program AutoNation CEO Mike Jackson called for last year to free up consumer credit [TALF] has just been enacted, now that we are actually seeing signs credit flowing and previously denied consumers getting auto loans, now it is time to jump ship.

    Time to jump ship for a reason that is unprovable and at best a wild guess. This is just typical. It gets even more bizarre when you consider AutoNation itself is not giving guidance. They have said that the situation is too fluid and changing daily, therefore any look down the road can easily be inaccurate. In other words, the guys who are on the inside and have all the information aren't comfortable looking down the road. Perhaps next time Mr. Langen ought to actually go to AutoNation, take a look around and talk to executives, it would improve the accuracy of his projections...

    Remember all the "buy calls and $900 - $1000 price targets from analysts in Google (NASDAQ:GOOG) when it was at $700???? Today it's at $330. So give this the same treatment... ignore it.

    Disclosure: Long AN
Source: UBS Downgrades AutoNation: A Reason to Ignore Analysts