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By Jeremy Glaser | 06-21-2010 04:04 PM

Three Auto Dealer Bond Picks

Morningstar's Dave Whiston and Rick Tauber survey the auto dealer bond landscape, and find three attractively priced issues.

Jeremy Glaser: Three auto dealer bond picks. I am Jeremy Glaser with I am joined today with Equity Analyst Dave Whiston and Credit Analyst Rick Tauber to talk about the auto dealer sector and to see if there is any opportunities for investors in bonds.

Gentlemen, thanks for joining me today.

Rick Tauber: Thank you.

David Whiston: Thanks.

Glaser: So, first-off, we've heard a lot about the plight of the auto manufacturers with GM's bankruptcy and Chrysler's bankruptcy, but how have the auto dealers been faring throughout the economic downturn?

Whiston: Well, unfortunately, the stocks did get pounded because they are cyclical just like the rest of the supply chain, but really if you break down the financial statements a little bit, you can see what happens is all the dealers, they really benefit at the gross margin line from a favorable mix shift to a very lucrative parts and service business, but they get hurt a lot at the operating margin level because they don't sell enough vehicles to cover their overhead. But compared to the lot of part suppliers that went bankrupt, for example, we didn't see that in the dealer space.

Glaser: So these are a little bit better. What do you think of the view of the dealerships going forward?

Whiston: I actually think it's a great time to be at one of this large publicly traded dealership companies, like Group 1 and AutoNation, even a smaller firm like Lithia Motors that has a rural geographic market niche. They've all done tremendous jobs improving their balance sheets, deleveraging and drastically reducing their costs.

So, when you see auto sales go from, say, 10.4 million last year back up to a more mean reversion type level of, say, 14, 15, 16, maybe even 17 million units, I think these dealers are going to be making a lot of money.

Glaser: Many of these dealerships, are they very focused on one brand, do they have a lot of risk there or do they tend to spread out across a lot of different makes.

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