Value in Auto Sector?

Some very big guns in the value investment world have been buying stocks in the auto sector. That means it is time to take a look.

In November, Berkshire Hathaway's (BRK.A) Warren Buffett disclosed a 13.98 million share stake in CarMax (KMX) valued at $284.3 million (9.6% of total). CarMax has 90 locations, where it sells mostly used autos. It also showed a new, 2.7 million share stake in Wabco Holdings Inc (WBC), a maker of braking and other vehicle control systems.

Sears Holdings (SHLD) Chairman Eddie Lampert has been very aggressive in adding to his AutoNation (AN) stake and still holds Autozone (AZO) shares. AutoNation is the behemoth of the bunch with 245 locations primarily in the Southeast US.

Leucadia National (LUK) recently agreed to a standstill after accumulating 30% of the outstanding shares of Amercredit (ACF), an auto loan servicing company. AmeriCredit's focus is primarily in the Southwest US.

All are hovering around 52 week lows.

It should be noted that this is NOT an endorsement of the US auto industry via Ford (F) or GM (GM) as these are just terrible businesses due to legacy union costs. They are stuck in a cost structure that dooms them. It is probably the only business the airlines can look at and say "at least we are not them".

It is to say that Americans have to drive. It is also to say that despite the current housing environment, the auto loan business has, up until this point, held up much better. My thinking is that I can walk away from my home if I am stuck in a resetting mortgage that will break me and still rent an apartment. But, in most cases, I will still need a car to get back and forth to work from wherever I end up living.

Because of that, I am far less likely to let them take my car or walk away from it, since once I do that, the odds of getting another one anytime soon in this environment is minimal. It is almost a built in base for the industry.

I have a really hard time saying Buffett, Lampert and the boys at Leucadia are missing the boat on this one since an investment with either in the last decade has crushed the market by a wide margin.
I will say that I am looking very closely at the sector and will most likely piggy back on something here.

Disclosure: Long SHLD.

Comments

[Thinkngrow:]

The pre owned or used car market may be in pre heat conditons as the number of buyers with stained credit is increasing. These buyers are almost always steered toward the higher profit used vehicle as subprime lenders require large upfront fees for loan placement. Consider the skinnier profits in new vehicles, and in turn commission to sales person, even customers with excellent credit are finding themselves persuaded to drive home a used car.

The problem at dealership level in used vehicles is maintaining attractive inventory....Carmax seems to have systemized and avoided this problem by offering national stocking and more aggresive advertising then other used car dealers.

2008 Mar 18 10:42 AM

[taoshum:]

Just check the attendance at Sturgis, SD in August and the 105th anniv rally in WI this summer. If it is way down, then HD will continue to fall. If it is steady or up... HD will thrive.

2008 Mar 18 05:50 PM

[Ryan:]

I agree!

2008 Mar 18 10:20 PM