Our #1 Stock for June
- Jun 17, 2005
- admin
- Investing
AT FIRST I COULDN’T BELIEVE MY EYES.
I was stunned. Taken aback.
No, I’m not talking about learning that the White House has the moxie
to actually use an executive from EXXON (SYM: XOM) to edit its
GLOBAL WARMING REPORTS.
Nor am I talking about Howard Dean referring to the Republican party
as primarily “white and Christian.”
The last I checked Alberto Gonzales was the Attorney General and Condi
Rice was Secretary of State.
Nope, what I happen to be talking about is the state of the U.S.
car industry.
Let’s see…..where do I start?
By now we all know that the business of making cars is a rough
business.
To start with the industry is unionized.
And for the car companies that’s a lot worse than you may think
it is.
When profits are strong in Detroit, unions threaten to strike unless
they get more money.
But when profits are weak the unions make sure the company is almost
on its deathbed before granting concessions.
That’s the reason I don’t buy stock in car companies: because unions
have almost all the UPSIDE of equity owners with cirtually NONE OF THE
FINANCIAL RISK.
Not a bad deal for them.
The second thing that’s hampering the car industry are what’s
referred to as “legacy” costs.
An example of a legacy costs is the amount of money Ford pays for
the health insurance of its retirees.
That means that if you retired from Ford 20 years ago you get to keep
the health insurance promised under that deal.
Those legacy costs add up: right now they cost GM $1,500 per vehicle.
In addition to all of those problems, U.S. car makers can’t seem to design
cars people want.
Instead of designing cars with the input of customers – like Toyota
and Honda do – G.M. and Ford design what they think people want and try
to force it down their throats.
The only nice looking car I’ve seen come from either was the new Mustang
that Ford released last year.
And that was only because it looks like the old mustangs from the 60’s.
Nope, when you really think about it GM and Ford are in a tough business.
So tough in fact that most of the time, the car makers take out their
troubles on car dealers.
That’s right. Car dealers get bullied by car makers.
Just think about it for a moment.
If you run a mom-and-pop auto dealer anywhere in the country than
you sell GM cars for whatever price they tell you to.
If Ford tells you they won’t accept less than $25,000 for a Mustang
than you have to sell it for $25,000 or you lose money.
Add to that the fact that Internet shopping has created informed customers
than you could imagine how rouch car dealers have it.
BUT THAT’S BEGINNING TO CHANGE – BIG TIME.
Let me tell you how.
Several years ago a Billionaire entrepeneur decided to “Roll-Up”
car dealers across the world and put them under one roof.
He figured that if he could string together say 100 dealerships or
so than the combined company could accomplish 2 things.
1. Save More Money: They’d be able to save money on costs such as marketing
around the country and items such as Customer Relationship management
software so they could squeeze the most money out of each customer.
2. Make More Money: Turn small $2 million dollar/year dealerships
that take orders from GM into a $20 Billion powerhouses that turns
the tables on GM.
How could you turn the tables on GM?
If you only sell $1 Million worth of cars, GM doesn’t really care
what if you’re truly happy or not.
But if you sell $20 Billion worth of cars than GM wants to make
sure you’re happy.
Or else you might sell more Toyotas. Or Hondas.
That’s when the balance of power begins to shift from the manufacturer
to the distributer.
And that’s what is happening in the auto industry.
Car dealers are banding together, saving money and making bigger
profits.
But Roll-Up strategies are notoriously difficult to pull off.
In fact, business history is littered with people that have gone
financially and emotionally bankrupt trying to pull them off.
But we’ve identified a car dealership that’s been gobbling
up independent dealers around the country.
In the past ten years the company has grown from an idea to
a $20 Billion company.
And now its starting to use its size to push GM and Ford around.
We’re not the only people who know this. In fact, some of the
biggest, smartest most informed money on the Street has been
buying shares of the company at these exact same levels.
Ed Lampert – the hedge fund manager who made $2 Billion last year
in K-Mart (SYM: SHLD) now owns 25% of the company and is buying
more.
So does famed value investor Bill Nygren.
They believe the company – which is selling for $20 per share –
is worth over $60 per share.
That’s one of the reasons we recommened the company in this
months issue of Fallen Angel Stocks.
The issue was released this past Wednesday and is available
to subscribers only.
If you want to know what we’re talking about all you have to
do is try our service free for the next 30-days.
Remember, you have nothing to lose.
–By Dylan Jovine