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Beyond Cash for Clunkers

Industry fundamentals will drive auto dealer performance more than government stimulus.

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The U.S. government's Car Allowance Rebate System (CARS), more commonly known as "cash for clunkers," has brought a lot of attention to the auto dealer sector. With dealer stocks having had a huge run in 2009, we thought this was a good opportunity to discuss CARS' impact on the auto industry, why we think the program is overhyped, and where the sector is going following one of the worst sales declines in history.

CARS Sales: Incremental or Pull-Forward?
First, let's look at the current impact of the CARS program. The $3 billion stimulus has been a success in that it has dramatically increased light-vehicle sales. According to Automotive News, the July seasonally adjusted annualized sales rate, or SAAR, increased to 11.1 million vehicles. No prior month this year even reached 10.0 million in annualized sales, so we think the program has brought consumers into showrooms who otherwise would not have bought a vehicle. The risk, of course, is that this incremental demand eventually turns into pull-forward demand. In other words, the stimulus could pull 2010 sales into 2009.

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David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.