Cash for Clunkers Beneficiary: AutoNation

Company Description: AutoNation Inc. (AN) retails, finances, and services new and used vehicles. The company also provides other related services and products, such as the sale of parts and accessories, extended service contracts, aftermarket automotive products, and collision repair services. AutoNation operates throughout the United States.

AutoNation and other new car dealerships such as Group 1 Automotive (GPI), Sonic Automotive (SAH), and Penske Automotive Group (PAG) will be the initial benefactor of the “Cash for Clunkers” bill. The government's plan to increase fuel consumption and stimulate auto dealers should give these public auto dealerships a boost as those with older vehicles trade in there vehicles for newer models. The revenue stream generated from this bill will come three fold for the auto dealers. The first being the initial sale of stale / existing inventory on the car lots, the second coming from the financing of the vehicle and third from the maintenance, repair and service done on the vehicle at the dealership.

The “Clunkers” bill stipulates that the customer will only receive the credit as a direct line item deduction from the purchase of a new vehicle. This means that the credit will act similarly to a down payment / cash toward the principle of a new loan. As credit standards have tightened dramatically, this pseudo down payment will help those with less than average credit qualify for an automobile loan. Public auto dealers have 4 main sources of revenue which include new vehicle sales, used vehicle sales, parts & service and financing. AutoNation’s main component of revenue is from new car sales and as this increases, it should create a perpetuity of income from servicing the vehicle over time.

The stock market seems to have already priced in a success story in the “Cash for Clunkers” bill as we have seen many of these automotive groups jump more than 100% and even 300% in some cases since the October 2008 lows. We expect that if this bill is refunded and consumers continue to be enticed to purchase new vehicles this rally will be warranted and may continue slightly higher.

Disclosure: Horowitz & Company clients may hold positions of securities mentioned as of the date published.

Comments

[Mad Hedge F...:]

And everybondy else. Perhaps it was the newspaper gene in me that made me screech my car to a halt when I saw a near riot in progress at my local Toyota (TM) dealer. The showroom was more jammed than the unemployment office, with eager salesmen recalled from vacations, manning card tables set up in every available space. I managed to grab one peripatetic salesman by a lapel, who gushed that they sold 45 cars yesterday, compared to ten for a normal Friday, and that 35 of these were the fruit of the “Cash for Clunkers” program. Sure I could get a $4,500 credit for my 1995 BMW (17 mpg), and apply it to a new Prius (50 mpg), taking the price down to $19,500 and the monthly payment to $450/month for five years. In fact, the government stimulus program was so successful, that it ran out of money in the first four days, and congress rushed to triple it to $3 billion on Friday. It was like the survivors of a ship torpedoed at sea were swimming frantically for the only piece of wreckage that floated. Assuming that the average car drives 10,000 miles a year, and the average swap generates a mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers will save 30 million barrels of crude a year, 1.5 days of our total annual consumption, or three days of imports. I asked to see the cars that were traded in and was told that the lots for the dealer, the used cars, and the detailer were all full, but I could see some if I went to the Target nearby where they were renting extra spaces. There I saw the fleet condemned to clunkerdom, GM Safari’s, Jeep Cherokees, Buick Regals, Dodge Ram pickup trucks and vans, and Chrysler minivans by the dozen, all with “CFC” marked on their windshields, a certain death sentence. These sorry excuses for transportation will never belch blue smoke, nor drip oil on our interstates again. I can’t imagine a sorrier commentary on the management failure of the US car industry for the last 30 years

Aug 03 02:45 PM

[Mad Hedge F...:]

bnh So now we have euthanasia for cars. The Wall Street Journal tells us that a government condition of the Cash for Clunkers program (see my last report at www.madhedgefundtrader... ) is that clunker buyers total the engines by pouring sodium silica into them. That way they can’t be resurrected like Frankenstein at the junkyard. What’s next? Free Viagra for the high mileage, new car buyers? There’s a certain poetic resonance there. Anything that works. In the meantime, the Republican Party is slashing its wrists by trying to block an expansion of the program. Is Mc Cain trying to lose the election a second time? I think he is oblivious of the warm and fuzzy feelings the program is generating, which is far more valuable than any direct economic impact. Don’t they have Ford dealers in Arizona? I never thought I’d run a car company chart again, but here is Ford in all its glory, up a mind boggling 65% since Cash for Clunkers started. Like virginity, confidence is very hard to recover, once it is lost.

Aug 04 05:33 PM

[greenbeast:]

Learn to spell, dood! Specifically, "their" instead of "there" and "principal" instead of "principle". Why read anyone's blog that never made it past the third grade.... anyway, I cannot compete with the wry humor of madhedgefund. So, instead, I will ask "If the excuse for CFC was to rid us of low-fuel-mileage vehicles, and presumably sane people were trading cars with less than $4500 value, wouldn't these vehicles be off the road in a couple of years anyway due to old age, maintenance, or whatever else drives an old vehicle to it's death?" So, what did my $4500 taxpayer (oh, excuse me, my wonderful government BORROWED the $4500) dollars get me? It subsidized ne'er-do-wells to purchase a new car they can't afford on terms they can't afford with tax dollars we can't afford. What lunacy. Why stop at a 2 trillion dollar deficit when you could have a ten trillion dollar deficit? What will you do to protect yourself and your family when the USA goes to pot and we default on all this debt we've issued that no one else can afford to buy and we can't afford to pay? Better think about that.

Sep 30 05:34 PM