Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Can AutoNation Survive Falling Car Sales?

Investors will ask can AutoNation survive falling car sales because the retailer is closing dealerships.

Specifically, AutoNation (NYSE: AN) is closing its Mazda and Volkswagen dealerships at the Roseville Automall in Northern California. The Sacramento Bee reports the Mazda dealer closed on 8 June 2019 and the Volkswagen dealership will cease operations in July.

Oddly, the Roseville closure comes after Volkswagen (DE: VOW) sales grew by 6% between May 2018 and May 2019, CleanTechnica estimates. However, sales for some major auto brands are falling.

For instance, Toyota (NYSE: TM) sales fell by 3%, Mercedes sales fell by 9%, Honda (NYSE: HMC) sales fell by 1%, and Nissan sales fell by 6% between May 2018 and May 2019. Moreover, CleanTechnica estimates the volume of new cars sold in the US fell by 42,200 between May 2018 and May 2019.

US Car Sales Collapse

Sales figures show that US car sales are collapsing. In fact, CleanTechnica estimates American car sales for every non-US automaker fell between May 2018 and May 2019.

For example, Hyundai’s year-to-year car sales fell by 12% during that period. Meanwhile, Hyundai’s May 2019 car sales were 19% lower than May 2018. Consequently, Hyundai sold 18,614 fewer cars in May 2018 than in May 2019.

Frighteningly, Hyundai is not alone. Audi’s year-to-year car sales fell by a whopping 79%. Notably, Hyundai’s sales volume fell by 69,579 between May 2018 and May 2019.

Industry leader Toyota experienced a 20% year-to-year drop in car sales and a 33,591 drop in sales volume. Even the ever-popular Subaru saw its year to year to car sales drop by 20%, and car sales drop by 12,034.

Are Auto Sales Really Collapsing?

The obvious result of the car sales collapse will be a lot of unsold vehicles at the dealerships. For example, CleanTechnica estimates the total volume of US car sales fell by 189,020 between May 2018 and May 2019. Moreover, sales volume fell by 26,372 in May 2019.

However, total vehicle sales in the US grew by 3% during May 2019, Reuters estimates. Total auto sales are growing because that figure includes vans, trucks, and sport utility vehicles (SUVs).

Notably, pickup truck sales are skyrocketing with sales of Fiat Chrysler’s (NYSE: FCA) Ram truck brand growing by 33% between May 2018 and May 2019. However, total US auto sales fell by 2.5% to 16.9 million, J.D. Power estimates.

Hence, the auto business is still good for those selling the vehicles the public wants. However, it is getting harder and harder to sell sedans to the American public.

Can AutoNation Survive the Car Sales Collapse?

AutoNation cannot escape the car sales collapse because it operates over 300 dealerships in the United States.

Dangers to AutoNation from the collapse include lots of unsold inventory, lower prices, and less foot traffic. Lower new car prices; in particular, could threaten AutoNation’s used vehicle business.

Currently, used car prices are good., however. The CarGurus Index shows the average price of a used vehicle in America fell by 0.02% in the 30 days ending 17 June 2019. However, the average used car price grew by 2.07% during the 90 days preceding 17 June 2019.

Are Used Cars a Value Investment?

However, The CarGurus data suggests there is still a lot of room for profit in used vehicles. In fact, the average used vehicle price was $20,490 on 17 June 2019.

Moreover, the price for popular vehicles is higher. Specifically, the average price for a used SUV was $26,381 on June 17, 2019. Plus the average price for a pre-owned pickup truck was $25,973 on 17 June 2019. In contrast, the average price for a used sedan was $15,769.

Used auto prices show why Warren Buffett invests in car dealerships through Berkshire Hathaway Automotive. New and used autos are expensive products, people need. Additionally, the financing of cars can generate lots of float.

Why Warren Buffett invests in Auto Dealerships

To explain, the average American needs a vehicle to get to places like work and the grocery store. However, 39% of American adults admit they could not come up with $400 to cover an unexpected expense, The Federal Reserve System’s Report on the Economic Well-Being of US Households in 2018, estimates.

Therefore, the average American needs to finance an auto. Moreover, that American will pay for the car purchase by sending in payments each month. Auto payments are excellent source of float because the car is the only transportation most Americans have. If they want to get around; and avoid a visit from the repo man, Americans must make the car payment.

Thus, car payments generate what Buffett calls “float.” To clarify, float is a stream of cash from regular payments, companies can easily tap.

Is AutoNation a Cash-Rich Company?

Conversely, AutoNation is not a cash-rich company despite the float. For instance, AutoNation reported a free cash flow of $199.7 million and an operating cash flow of $259.7 million on 31 March 2019.

Meanwhile, AutoNation reports a negative financing cash flow of -$210.9 million and a negative investing cash flow of -$48.6 million. Thus, AutoNation’s business appears to generate little cash.

Moreover, AutoNation had just $48.7 million in cash and short-term investments on 31 May 2019. Thus, AutoNation could collapse quickly because it has little cash.

Is AutoNation Making Money?

The low cash flow raises the question does AutoNation make money? Stockrow’s answer to that question is AutoNation makes a little money.

In detail, AutoNation reported a gross profit of $848.2 million on revenues of $4.981 billion on March 31, 2019. However, AutoNation reported an operating income of $182.1 million and a net income of $92 million on the same day.

AutoNation is making a little money but its revenue growth is shrinking. For instance, StockRow reports AutoNation’s revenues fell for the last three quarters. Specifically, AutoNation’s revenue growth fell by 1.53% in the quarter ending on 30 September 2019, 4.78% in the quarter ending on December 31, 2019, and 5.29% in the quarter ending on 31 March 2019.

Moreover, AutoNation’s revenues fell from $5.412 billion on 31 December 2019 to $4.981 billion in March 2019. I think these figures show AutoNation’s business could be unsustainable. Simply put, AutoNation cannot sell enough vehicles at prices high enough to sustain its business.

Will AutoNation Survive?

This sustainability crisis occurs at a terrible time for AutoNation because the auto business is undergoing dramatic changes.

First, Americans vehicle-buying habits are changing dramatically. Dramatically, Ford (NYSE: F) and Fiat Chrysler (NYSE: FCA) have basically ended sedan production in the US. Meanwhile, General Motors (NYSE: GM) is killing off several models of cars in a bid for survival.

The end of cars could force AutoNation to reduce its footprint and dealership sizes. I think the car dealership of 2025 could only sell pickups, SUVs, and a few vans. Thus, we could see smaller dealerships selling fewer vehicles, but they will be higher-priced and higher profit.

New Threats to AutoNation

Second, dangerous new competitors are entering the auto business. Notably, Berkshire Hathaway (NYSE: BRK.B) is competing directly with AutoNation in several major markets.

Los Angeles, San Jose, San Francisco, Miami, San Antonio, Houston, Dallas, Kansas City, and Orlando all have Berkshire Hathaway dealerships. Berkshire could offer far better deals on financing than AutoNation because it has all of Warren Buffett’s money behind it.

Additionally, Berkshire Hathaway Automotive is in a far better position to deep discount because it is part of a larger organization. I think Berkshire Hathaway could sell cars at lower prices; which could reduce dealership profits and ultimately kill AutoNation.

How Rideshare Threatens AutoNation 

Beyond Berkshire, there are the new business models for car sales that are cropping up. For instance, Tesla (NASDAQ: TSLA) operates its own dealerships and BMW (OTC: BMWY) is in the rideshare and short-term car rental business through Reach Now.

Rideshare and short-term car rental are bigger threats to AutoNation because they eliminate the need for vehicle ownership. Beyond BMW, Ford and GM are also experimenting with rideshare.

Thus, AutoNation could compete with auto manufacturers which have far greater resources soon. Ford, for example, had $37.730 billion in cash and short-term investments on 31 March 2019. Thus, Ford can afford to spend a lot of cash scaling up its ride share service.

How Self-Driving Vehicles Threaten AutoNation

Self-driving vehicles pose a greater and more complex threat to AutoNation. The goal of autonomous vehicle ventures like Alphabet’s (NASDAQ: GOOG), Waymo is on-demand self-driving vehicles. Accordingly, Waymo is already operating a ridesharing service in Arizona.

Waymo and Uber’s ultimate goal is a vehicle that will come and pick you up anytime anywhere at the touch of an app. This could eliminate the need for car ownership by providing fast, cheap, and reliable local transportation.

Many observers are predicting the end of car ownership within 20 years, BBC News reports. To explain, analysts believe only hardcore gearheads will own vehicles in coming decades. Everybody else will rely on self-driving vehicles for day-to-day transportation.

Instead of owning a vehicle you will use an app to call the vehicle you need. For instance, you could summon the self-driving Ford pickup for a trip to Home Depot, or order the self-driving Mercedes for date night.

Obviously, there could be no place for AutoNation in such a world. To explain, rental companies like Hertz (NYSE: HRI) or automakers will own the vehicles. Riders could either pay per ride through Uber or Lyft (NYSE: LYFT) or pay a monthly fee for access to vehicles.

Another potential huge owner of such vehicles is Berkshire Hathaway (NYSE: BRK.A) which could lease vehicles to rideshare services or directly to the public. Instead of GEICO car-insurance, you could belong to the GEICO car service which will provide transportation for a monthly fee.

AutoNation Faces Doom

Thus AutoNation’s business faces doom in the long-run, but is it a good short-term value investment?

My answer, despite the low price; $42.52 Mr. Market gave it on  21 June 2019. AutoNation (NYSE: AN) is a lousy stock. I think AutoNation is lousy because it generates little cash and pays no dividend.

If you want to invest for the future of vehicles for a low price investigate Ford instead of AutoNation. Appealingly, Ford is cash-rich, but it had a real share price of $9.99 on 21 June 2019 and paid a dividend of 15₵ on 3 June 2019.

As for AutoNation, I predict it will collapse or get acquired by a larger organization. My prediction for AutoNation is that it will become part of a larger company like Berkshire Hathaway (NYSE: BRK.B), Avis-Budget Group (NYSE: CAR) or even an automaker. Acquisition is inevitable because I cannot see how AutoNation will survive as an independent company in a changing auto industry.