Clunker Crash for Car Dealers?

Several local news outlets are reporting that car dealers are experiencing a post-Cash for Clunkers Slump in sales. There is concern that the government's incentive program took sales away from the fall (and even 2010) by giving consumers reason to purchase new vehicles over the summer instead.

It is definitely taking sales away from September. Edmunds.com calculates that September sales are running at an 8.8 million unit pace. To put this number in perspective, Edmunds Senior Statistician Zhenwei Zhou said sales last September were 12.5 million. He also added "it had been over 16 million for years".

Whether this month's slump continues throughout the remainder of this year and into 2010 remains to be seen. Many carmakers are expected to introduce new incentive programs in addition to rolling out new models. Plus, two of the best-selling cars over the past several years - the Toyota Camry and the Honda Accord - did not qualify for the Cash for Clunkers rebate. (Even my V6 Accord was too fuel efficient to qualify.)

Earnings Estimates for Dealers Are Mixed

The 2009 and 2010 Zacks Consensus Estimates for AutoNation (AN - Analyst Report) and Penske Automotive Group (PAG - Analyst Report) have been revised upward slightly over the past few weeks. These changes likely reflect the boost provided by the CARS program, however.

There has not been any change to forecasts for Asbury Automotive Group (ABG - Snapshot Report). The 2009 Zacks Consensus Estimate for Sonic Automotive (SAH - Snapshot Report) is falling, down 2 cents this month to 64 cents per share. (The 2010 Zacks Consensus Estimate is also lower.) One analyst recently cut his full-year profit forecast on Group 1 Automotive (GPI - Snapshot Report), though the revision did not affect the consensus forecast.

Revisions Are Favoring Used Car Dealers

Ironically, earnings estimate revisions are most bullish for used car dealers America's Car-Mart (CRMT - Snapshot Report) and CarMax (KMX - Analyst Report).

All 4 covering brokerage analysts raised their fiscal 2010 profit forecasts on CRMT this month. The revisions pushed the Zacks Consensus Estimate 21 cents higher to $2.01 per share.

KMX reported fiscal second-quarter results yesterday. The company enjoyed an 8% increase in same store sales. Profits totaled 47 cents per share, a big improvement over last year's earnings of 6 cents per share, and far above the consensus estimate of 18 cents per share. In addition to seeing improved traffic patterns, the company benefited from higher used car valuations. KMX said that its used vehicle profit increased to $2,120 per unit from $1,870 per unit.

Keep An Eye On Used Car Inventories

Used car inventories are the other post-CARS wildcard. Used car prices had been on the rise this year as consumers found difficulty obtaining credit for new car loans or looked for cheaper alternatives. The Cash for Clunkers Program cut supply further by scrapping the trade-ins. Though some vehicles will end up back on dealer lots because they did not qualify for the rebate, many cars and trucks are now permanently off the road.

CarMax CEO Tom Folliard acknowledged on yesterday's conference call that used car supply is down, but he also stated that used car inventories are largely dependent on new car sales. If Cash for Clunkers truly did take sales away from the future then used car prices could stay elevated. This lack of supply could continue to drive up trade-in values, putting sustained pressure on new car margins, while providing used car dealers with further pricing power.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.