Tire-Kickers Like What They See in Auto Dealers

Shares of auto dealers moved into high gear Thursday, a day after United Auto Group (UAG) raised its fourth-quarter earnings outlook, citing strong sales growth for its foreign brands.

Goldman Sachs helped the group by issuing a positive research note on rival Group 1 Automotive (GPI), saying the stock is attractive in the near term because of the success of 0% financing, which is allowing car makers and dealers to sell more vehicles.

The auto dealers have seen their shares rebound with the rest of the market since the terrorist attacks in September. United Auto, AutoNation (AN) and Sonic Automotive (SAH) touched 52-week highs Thursday. But some caution that investors may have gotten ahead of themselves.

"The question here is what's going to happen over the next two quarters," said Peter Cardillo, chief strategist at Westfalia Investments. "The 0% financing certainly lured in a lot of people, but the economy is still in recession and not poised for a rebound until at least the second half of the new year."

United Auto recently gained 11.7% to $25.85, and AutoNation was up 3.4% to $12.97. Sonic was recently down 2% to $22.41 after earlier trading as high as $23.95. Meanwhile, Group 1 rose 6.4% to $27.61. The stock has a 52-week high of $34.99. Since Sept. 21, when virtually every sector of the market cratered, United Auto has soared 114%. AutoNation has risen 49.8% since then, and Sonic has gained 110%. Group 1 is up 23.9% during the same span.

United Auto, which is based in Detriot, said Wednesday that it expects to beat analysts' expectations for the fourth quarter by at least 4 cents a share. Analysts polled by Thomson Financial/First Call expect the company to earn 27 cents a share, up from 21 cents in the same period last year. As a result, the company said it sees earnings of at least $1.30 a share for the year ending Dec. 31.

Moving Iron

Consumers in the U.S. have responded enthusiastically to the cheap financing incentives from automakers such as General Motors (GM), Ford (F) and DaimlerChrysler (DCX), which were introduced after the terrorist attacks. The incentives were meant to last until October, but many have been extended to early January.

Auto analysts believe that 2002 could be a difficult year for the U.S. carmakers. In contrast, Asian automakers, such as Japanese giants Toyota Motor (TM) and Honda Motor (HMC) have been winning their share of the U.S. market.

"Although the fourth quarter has been positively impacted by 0% financing offered by the domestic manufacturers, UAG is achieving double-digit same-store growth in all of its significant foreign brands," Roger Penske, the chairman of United Auto, said in a prepared statement. "In particular, our Toyota and Nissan (NSANY) brands are experiencing same-store growth exceeding 25%."

Cardillo believes that the buying binge may be short-lived, if most buyers have already taken advantage of the financing incentives. Moreover, automobiles are large-ticket items that people don't buy during hard economic times.

"Don't forget we still have a very weak jobs market that will probably continue to weaken for next two or three months," he said. "The [auto dealers] have done exceptionally well, but I think that as interest rates start to go up, it's going to cut into their business."

>To order reprints of this article, click here: Reprints