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Will CARS Really Sell Cars? + Vic Wisemann’s Thoughts on: F, TM, HMC, DAI, TTM, AZO, AAP

Vic Wisemann
InvestorsObserver
Featured Contributor

General Motors and Chrysler have both received auto bailout funds from the federal government, but the auto industry hasn't been saved and it hasn't stopped asking for federal dollars.

General Motors recently received final court approval to borrow up to $33.3 billion to carry the automaker through its bankruptcy. GM had received interim court approval on June 2 to access up to $15 billion of the bankruptcy financing, also known as a "debtor-in-possession" or DIP loan. The recent order cleared the way for GM to access the rest of the DIP loan, which is the largest ever approved in a U.S. bankruptcy.

A month earlier, Chrysler entered into a plan that would allow the United Automobile Workers to take control of the company, with Fiat and the United States as junior partners. The government would lend about $8 billion more to the company, on top of the $4 billion it had already provided.

With the big three now down to the big one, Ford Motor Co (F), and bits and pieces of General Motors and Chrysler, who will step into the gap left in market share. To be certain the Asian automakers like Toyota Motor Corp. (TM) and Honda Motor Co. Ltd. (HMC) are up for the challenge as well as Daimler AG (DAI). Will there be room for relative new comer Tata Motors Ltd. (TTM) in the sector. More importantly, will there be a gap to enter or is the market for auto sale going to continue to shrink?

Read on to see how to make a nice profit even in this lagging industry.

According to a study recently published by R. L. Polk & Co., Americans are keeping their cars on the road longer than ever before. One look at recent monthly sales figures should be enough to explain the phenomenon, as drivers are delaying the purchase of a new vehicle as long as possible. Much of this trend can be attributed to the current economic climate since consumers have less money each month to spend on transportation needs.

After analyzing data from July 1, 2007 to June 30, 2008, Polk has found that the average passenger car in use in 2008 was 9.4 years old, a figure that surpasses the previous record of 9.2 years from the last two years. With cars staying on the road longer, maintenance and replacement parts will be areas of growth. Companies like AutoZone Inc. (AZO) and Advance Auto Parts Inc. (AAP) will be fighting it out for the additional dollars spent to keep vehicles running.

An interesting side note to all of this data is that older cars are almost universally dirtier and less fuel efficient that their newer siblings, meaning that this could turn into quite the dirty trend if it continues in the coming years.

To encourage consumers to trade in these less than desirable vehicles, the government has come up with the Car Allowance Rebate System (CARS), formerly referred to as the “Cash for Clunkers” initiative recently signed into law by President Obama. The new CARS law allows consumers to receive up to a $4,500 voucher to trade in their old gas guzzlers for a more fuel-efficient new vehicle.

In addition, the IRS is also getting in on the push to sell new vehicles. A law enacted earlier this year allows many taxpayers who buy new cars and other types of motor vehicles during a certain time period this year to deduct the state or local sales taxes, or excise taxes, paid on the purchase.

The Treasury Department and the Internal Revenue Service recently decided that "purchases made in states without a sales tax - such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon - can also qualify for the deduction." Apparently everyone will be able to get something if they purchase a new vehicle this year.

Add the new incentive to the pressing need of auto dealers to move inventory off their lots and you have a magic formula for sales. But who is going to get this business?

Consumers may only feel partially assured by government guarantees of Chrysler and GM warranties. These companies are also severely cutting down the number of dealerships in their networks, leaving a glut of inventory in the market with no real home.

Once the dealer closings filter through the market Honda and Toyota will most likely pick up the bulk of any market share available with Daimler gaining in the luxury sector. Ford will make an effort but they are carrying too much debt right now to make fast moves in the market.

Looking at the auto industry, DAI presents a nice shorter term trade to consider with the August 30/25 bull call spread for a 4.40 debit. The trade would result in a 13.6% return and the stock could fall 15% and the trade would still have a profit.

Always be aware of your risk tolerance and performance goals when looking at potential trades. If the trade you are looking at does not fit, then walk away. Do your homework and try to have a little fun.

f you have had any additional thoughts, ideas or hidden gems in the market please e-mail vwisemann@InvestorsObserver.com.