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Bear of the Day: Cars.com (CARS)

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A study by consumer automobile website Edmunds.com found that Americans rate “buying a car” more stressful than “getting married.”

What if you could buy a car with all the features you desire from the comfort of your own home? You’d get a low, no-haggle price and all the help you need with delivery and service, but without ever setting foot in a traditional dealership or talking to a salesman.

Well that’s happening, slowly but surely, but Cars.Com (CARS - Free Report) is not going to help you.

Though the name promises a high tech alternative to the traditional dealership model, the reality leaves much to be desired. Cars.com doesn’t sell (or buy) automobiles. They function as an intermediary between buyers and sellers - and most often the sellers are dealers.

Through its recently acquired Dealer Inspire business, the company promises a faster and easier buying process, but the sellers are still traditional dealers – albeit in sheep’s clothing.

Automakers would love to eliminate their independent dealer networks and sell direct to consumers, but numerous roadblocks have been erected over the past 100 years or so. Archaic state laws that were originally intended to protect small independent dealerships from predatory practices by manufacturers now have essentially the opposite effect, allowing well-capitalized dealer ownership groups to stand in the way of the progress desired by both automakers and consumers.

When Tesla (TSLA - Free Report) began selling cars directly to consumers, it wasn’t other manufacturers who objected, it was dealer networks who feared the imminent demise of their cash cows. Tesla didn’t have a legacy of restrictive contracts with dealers to keep it from selling its own autos, but – even after protracted legal battles and many victories – the company remains prohibited or restricted from selling its own vehicles in 6 US states.

It’s nothing less than an assault on the free market and it takes money out of the pockets ofconsumers and automakers alike to enrich politically connected fat-cat auto dealers.

Luckily, it looks like it’s finally coming to an end.

Automakers are preparing for a sea change in the way we buy and use automobiles and it’s not likely to involve dealer networks. Ride-sharing is already taking a big bite out of ownership figures, especially younger people, and autonomous vehicles will do the same.

Manufacturers are also experimenting with subscription services that allow consumers to drive the vehicle of their choice and make trades without ever actually taking ownership of a car. Private businesses like Flexdrive, Carma and Clutch offer similar services.

Selling advertising for auto dealers is a business with a limited future and Cars.com’s recent earnings estimate revisions exemplify the concept.

In the past 30 days, the Zacks Consensus Earnings Estimates for 2019 and 2020 have fallen 25% and 20%, respectively. Those negative revisions earn Cars.com a Zacks Rank #5 (Strong Sell).

Cars.com gets a Style score of “D” in both Value and Growth and an “F” in Momentum. It’s total VGM score is also a “D.”

That's almost the worst report card we offer at Zacks.

When an industry gives up on innovation and simply tries to suck the last bit of easy profit out of a failing model, you don’t want to touch it as an investor.

Though Cars.com sounds like a high-tech alternative, it’s really just an extension of the old dealer model that (almost) everyone would like to see gone.

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