Summary
With analysts predicting the worst car sales year since 1994, Edward Lampert is increasing his AutoNations holding to a 37.2% share of the company.
Analysis
This years models at the New York Auto Show haven't caught quite as much attention as the most pressing question facing the industry: Which way is the economy heading?
Until this week forecasters were calling for about 15.5-16.1 million cars to be sold in 2008. Then on Tuesday, J.D. Power and Associates cut its forecast to 14.9 million, which would be the lowest since 1994.
A weaker U.S, Economy could threaten the turnaround plans of the Detroit Three as well as put the brakes on sales for the imports, some of which seem to be unaffected by gloomy economic news.
In spite of all this, or perhaps because of it, billionaire investor Edward Lampert continues to raise his stake in the country's largest publicly-owned auto dealership group, AutoNation. Lets take a guess at what could be behind his latest moves.
AutoNation, like other public dealership groups, has been stung by the slowdown in new-vehicle sales. The Fort Lauderdale company depends heavily on markets ni Florida and California, which are suffering from the bursting housing bubble.
This week AN Chairman Mike Jackson did an interview and spoke of running his business for "a thousand year flood." He then said if auto sales fell to 10 million units, "a depression" he called it, his business would be "cash flow neutral." That is his basis for decision making.
As a potential investor, this fantastic news. It simply means that the business would produce cash even in an almost devastating economic climate.
It also makes sense as to Lampert's interest in AN. He is a cash and balance sheet investor-see Sears Holding. A positive cash company in the current economic climate makes for tremendous flexibility that competitors will not have. Jackson can reduce debt, repurchase shares or expand.. Jackson has reduced share count by 30% over the last two years.
In the past two years U.S. retail auto sales have declined 12%. We should keep in mind that economic downturns run in cycles of 30 to 40 months, and the market is currently 24 months into the downswing.
When things get better, investors ought to see an amplified increase on the other end due to the repurchases. Hold flat in down times and explode up in good ones, nice move.
