Thursday, December 18, 2008

Auto Economics, Eddie, and the Microsoft Founder

Here's an odd couple:

With all the opportunities available, across every market, it is interesting that Lampert and Gates chose used cars. AutoNation is selling for less than book value, but this is hardly rare in hard-hit sectors. What they might see, aside from undervaluation, is a shift in consumer decision-making.

Here is a basic observation on auto economics: Given the tremendous depreciation that occurs over the first few years of owning a car, and the fact that late-model used cars are essentially the same as new cars, there is no financially-logical reason ever to buy a new car.

Moreover, with Americans' household wealth eroding at a historic rate and real incomes declining over the past decade, the sticker prices on new vehicles look ridiculous
$30,000? $40,000? Forget your existing debt burden, maybe you want to finance it?

Despite the woes of the automobile sector, Americans will always need cars
they just don't have to be new cars. In fact, if the demand for used cars picks up over the coming decade, there is an obvious supply constraint if new car sales are down, the existing stock of used cars becomes more valuable. This could give a greater degree of pricing power to dominant dealers like AutoNation.

Indeed, Berkshire Hathaway recently reported a large stake in CarMax, which is a competitor of AutoNation. This may well be a new play on a deeply distressed sector, similar to the overtures into auto components companies by financiers like Wilbur Ross.

For some reason, I just never pictured Warren Buffett, Eddie Lampert and Bill Gates as used car dealers. But evidently the times have changed...

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This work by Nicholas E. Radice is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.