Friday, July 31, 2009

AutoNation (AN) Solid Results; A Way to Play Cash for Clunkers 1.0 and 2.0

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I have a few interesting emails the past week that, combined with what I've been writing, made me think about the direction of the country. When you take a few steps back from the day to day, it really is amazing how involved government now has their hands in almost everything. I used to snicker (pre 2007) by all those who preached America is about "free market capitalism" and now I think anyone who speaks like this has simply reverted to some idealistic text book world. He/she looks at what America is with an asterisk (or perhaps longs for some long forgotten era)... i.e. well if you just don't count these 87,000 programs* we're full on free market capitalism. As we wrote in this post, even the champions of US Industry understand there is very little free market capitalism going on anymore - it's all about handouts and favorites and being positioned advantageously under the teat of the government.

And yes, each of those countries did a bevy of government incentives which is anathema to our (ahem) "free market ideology" (I say that chuckling under my breath based on what we've been seeing for 2 years) Even the CEO of General Electric (GE) was out this week saying that in the U.S. "it is not a free market, it never has been" when he was talking about his decisions to go after the money the government is offering left and right. Personally I much prefer when the truth is spoken, even if it's ugly - versus the dogma that dominates our media and national mindset. Thanks Mr. Immelt for speaking reality.

It's never been a free market; it's never gonna be a free market. That's just the way it is. The fact that I'd like GE to work in concert with where government policy is in the U.S. doesn't mean that I'm a traitor or a bad guy, I think it's just being practical that that's gotta happen.


As noted hedge fund manager Doug Kass says, you cannot be moralistic if you want to profit from the actions going on in this country. So as Step 1 one must sit and think, if it won't change... and in fact it is accelerating, how can I - aside from participating in the handouts themselves, benefit from the wealth transfer from future generations of unborn to the "so deserving" today? That's our jobs as speculators whether we like what is going on, or not. Step 2 is to stop the denial - our corporate leaders long ago dropped the denial and have benefited immensely. Most of the public deniers are wrapped within the dogma of one of our political parties and their associated media outlets - ignore the talking points, it's a fantasy land. Step 3 is realizing even more opportunities are cropping up by the (seemingly) month; not only is the growth of programs increasing - frankly it is at a historic, rate. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] [May 5, 2009: Federal Aid Surpasses Sales Taxes as Top Revenue Generator for States]

If you are honest with yourself, it is no different than our current economy as a whole or the stock market. As each tick ever higher goes the market, just try to wash your mind from the fact someone's great grandchild is subsidizing this move. We've taken from future generations to support ourselves today - to drive economic activity and stock market returns. And we're darn proud of it - look at the smiles all over the country at the "success". Complain all you want you tiny minority of long term thinkers (I certainly have) but people are profiteering at a rampant pace and certainly most appear to have no qualms in the country. When you don't think out more than next month, life is much simpler. Please note the the glee in consumers faces on local TV news stations as they drive off the lot in new cars on their grandchildren's dime!

We do indeed have socialism here, but most of it is corporate socialism unlike the socialism that is focused on the workers class in much of Europe. Ah, some of it spins off onto the consumer here as well, but only a fraction. My favorite term for what we have in the US is Reverse Robin Hood - take from the many to give to the few. Which again, is why I snicker each time I hear the arguments against the potential for "socialism in America." Potential? It's here folks - it has been here, and those who argue against it normally are receiving huge amounts of lobbyist dollars from those who benefit the most from it. The main thing they are fighting is European type socialism - if its American type socialism, they are "all in" (by their actions, ignore their words).

Getting back to how we can benefit from the transfer of US taxpayer dollars from the many to the few: US farming has been one area for a long time. (before you shed a tear for the small family farm which is the first dogmatic response ingrained in our head, please research the massive farm bill, and what % of US agriculture is done by corporate versus 'family farm'). Our readers know the truth [Mar 27, 2008: WSJ - Farm Lobby Beats Back Assault on Subsidies] Oil has been another. Obviously US banks are the most obvious investment nowadays. US home builders have been another - although the housing market has been so distraught it's not been quite as easy of a play in the near term. We own Ocwen Financial (OCN) as a play on the handouts to the mortgage industry to "do the right thing" and "get people's mortgages adjusted" - even those poor sods who put nary a nickel into their homes via down payment. [Apr 22, 2009: Fight the Power - or at Least Hedge Against It with Ocwen Financial] [Apr 15, 2009: Treasury Saving $10 Billion for Big Banks to Modify Loans] And now we have the auto market.

Just yesterday we wrote in [Jul 30, 2009: Cash for Clunkers a Bit Hit; Government Asks "What Can We Buy You Next?]

Then, after this handout to buy cars empties I envision the program being extended. That should get us through 2010.


Well good news folks; within 24 hours of that piece it looks like we're already empty in the bank vault! This program was supposed to get us through Nov 1st, but Americans across the land have already spent the $1 Billion. Look, we're a people that will spend 2 hours in line just for a free $5 pizza - do you not think when the government gives us money from the heavens we won't jump? Now, lawmakers are furtively looking for ways to put more liabilities on our future generations to give to the so deserving today. And with an election coming in 2010 and the real economy is quite pitiful shape I am fully confidant they will be very successful! Remember how US programs go ... sell it under "1 cost" so you can say it won't be too expensive, and then once the program is running, explode it.
  • The Department of Transportation told auto makers the Obama administration is looking at "all options" to getting additional funding for the "cash for clunkers" incentive program, a person who was briefed on the matter said.
So as stock market speculators I want you to rejoice - immense funnels of money are coming from the future into our hands today. Because we (corporate and citizen) deserve it, we are the chosen ones and we worked hard for these rewards. Make sure to high 5 any child under the age of 5 this weekend and tell them "thank you" - they are getting the bill for this "prosperity". (p.s. if everything is so rosy, why are Federal Reserve rates sitting near zero again? nevermind - rhetorical question - back to green shoots)

So let us find our Ocwen Financial of the automotive field. The easiest choice of course are automakers - and Ford's (F) results I am sure will be subsidized nicely by the direct transfer of money from the grandkids to corporate coffers.

But since they still have huge liabilities and costs I'd like a simpler pure play - a name I've been watching for a good 4-5 months but never unfortunately, pulled the trigger on - Auto Nation (AN).


Now if you are a 2nd derivative fan you could also go with any number of chains heavily dependent on used cars - i.e. as new cars are bought and clunkers dismantled (keep in mind some of these "clunkers" are younger than most of the grandkids we're stealing from) you could make a connection that the whole daisy chain from new to used will benefit. Certainly the market has made that case... [Jun 19, 2009: Carmax (KMX) Roars on Earnings]


But let's keep it simple and focus on Auto Nation which reported last night - first the immediate benefit.
  • AutoNation Inc., the country's largest chain of car dealerships, said Friday that it has sold more than 3,000 vehicles in the past week through the Cash for Clunkers program. "It's been a huge success," Chairman and Chief Executive Michael J. Jackson said in a brief interview. "I think there has been a psychological effect and gotten consumers to start buying cars again."
  • Traffic in AutoNation's 264 franchises increased 36% after the Department of Transportation launched the "cash for clunkers" incentives July 24, Mr. Jackson said.
Now extrapolate that to the coming months as "officials look at all options" to stimulate Americans to get us back to our correct culture of spending money even if we don't have it. (remember, we deserve it) And as investors just remember, these consumers are only conduits to take money from the future and into the now. The consumer only has the money for mere days (if not hours) - if it's a $8000 tax credit, a $4500 clunker handout. Where the money lands as a final destination point is the key: the balance sheets and profit and loss statements of corporate America. (Corporate) Socialism at it's best - err, I'm sorry, free market capitalism working like a charm.

Let's take a quick look at earnings.
  • Top U.S. auto dealer chain AutoNation Inc (AN) posted a 29 percent drop in quarterly earnings, but forecast an improving domestic vehicle market after slashing inventory costs and seeing a sharp gain in July sales. "The downward spiral has been broken," AutoNation Chief Executive Mike Jackson said. "We saw a stabilization in sales in the second quarter, and there will be a recovery in auto sales. There's no question about it."
  • Second-quarter net earnings fell 29 percent to $36.7. million, or 21 cents per share, from $51.8 million, or 29 cents per share, a year earlier. Revenue dropped 29 percent to $2.6 billion. Excluding one-time items, earnings from continuing operations were 29 cents per share. That was above the 25 cents that analysts on average had forecast on that basis, according to Reuters Estimates.
  • For the quarter, the company said domestic segment income was $26 million compared with $33 million in the year-ago period, with a 34 percent decline in new vehicle sales. Income from imported vehicles declined to $42 million from $57 million last year, with an 41 percent drop in new vehicle sales. Premium luxury income was $43 million compared with $52 million a year ago, with a 34 percent slip in new vehicle sales.
  • Sales of new vehicles at AutoNation stores fell 38 percent during the quarter, but the company said it fared better than its peers. Industrywide, new vehicle sales fell about 40 percent, the company said, citing data compiled by CNW Research.
  • AutoNation is the largest U.S. dealership chain by sales. The Fort Lauderdale, Florida-based company operates 264 dealerships in 15 states.
[Oct 1, 2008: Reuters - 1 in 5 Auto Dealers Could go Under by 2009]

No positions but definitely figuring out the "new era"!


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