Debunking Clunker impact

Jan. 1, 2020
Although the program has boosted sales, BB&T maintains the aftermarket has not been greatly affected by Cash for Clunkers.
Cash for Clunkers government When we initially addressed the "Cash for Clunkers" issue a few months back, we were of the opinion that it would marginally, if at all, impact the underlying fundamentals for the aftermarket. So here we are, a few months later, and while the program has caught fire (with the initial $1 billion in funding exhausted within the first few days and an additional $2 billion in follow-up funding having been appropriated), we maintain our view that the aftermarket will ultimately not be greatly impacted by the program.
As we reflect on what the CARS (Car Allowance Rebate System) program is actually accomplishing, we note that many are focused on the here and now. And in fact, it's next to impossible to avoid media attention as most news articles and commentaries appear to have positioned this program as the single largest stimulus for the economy and the saving grace for the auto industry as a whole. The Obama administration highlights how this program is successfully stimulating the automotive industry in addition to helping the environment as these "old clunkers" are taken off the road, improving aggregate emissions levels. At the end of the day, however, we wonder how many of these new car purchases would have happened anyway over the next 6 to 12 months. Sure, it's great to have a $3,500 to $4,500 credit, but as with most things, nothing in life is free. So for those staunch supporters who view $3 billion as a small price to pay for up to 750,000 in new car sales, we pose this question: Did the auto industry learn nothing from the 0-percent financing or employee pricing schemes of just a few years past?

In fact, one could argue that once the funds for this program have been exhausted, there will be a pronounced deceleration in the seasonally adjusted annual sales rate (SAAR) on a monthly basis. As an owner of GM (as all taxpayers are), we just wish a few more of the vehicles being purchased with tax dollars would be Chevys. GM sales in July were down 19 percent year-over-year, and 38 percent year-to-date versus total light vehicle sales declines of 12 percent and 32 percent, respectively.

It seems almost unfair that the government would be able to sponsor a program that stimulates new car sales when it has such a large ownership stake, as the government now juggles the many roles of owner/operator, investor, regulator and consumer advocate. Has anyone noticed that trends in the rest of the retail segment appear to be stalling (retail sales, excluding autos, declined 7.9 percent year-over year-in June, following -7.6 percent in May, -7.5 percent in April and -5.6 percent for all of Q1)? While consumers are putting proceeds to work purchasing new vehicles, they now also have a monthly car payment that will prevent them to some extent from putting dollars to work in other areas of the economy. Overall, we still worry that reinforcing bad habits of the past may simply result in a more cash-strapped consumer.

The point for the aftermarket is this: Of the 243 million or so cars on the road today, roughly 113 million (or 47 percent) are 8 years old or older. When we think about the 750,000 or so cars that are likely to be taken off the road and scrapped as a result of the CARS program, this subset represents only .7 of 1 percent of vehicles in the 8-year-old or older category and only .3 of 1 percent of the U.S. vehicle PARC in total. It will certainly be interesting to compare the scrappage rate at the end of 2009 and see just how much higher above the historical norm it will be.

When we look at some of the vehicles being taken off the road to help stimulate a few more new car sales today, it is concerning from the standpoint that many of these vehicles appear to have very usable engine and drivetrain components that will be destroyed. In addition, in this economic environment, we think there were likely buyers of these vehicles that could have extended useful life for another 10 years or more with proper maintenance and repair. Yes, we are in favor of improving our country's emissions profile. That said, when the stipulation for new vehicle eligibility under CARS for passenger automobiles is a mere 22 miles per gallon combined fuel economy — up just 4 mpg from those clunkers at 18 mpg — the environmental underpinnings of the program become almost laughable.

We suspect that 12 months from now the new vehicle SAAR will approach the 12 to 13 million level, driven by an uptick in captive leasing programs, favorable financing terms and modest improvement in the economy. That said, we are still believers that when looking at the average household with more than 2 vehicles and almost 1.2 vehicles per licensed driver, the new vehicle sales environment of today is simply a result of the strong sales experienced in the late 1990s and early 2000s. While there will always be those consumers drawn to the new car smell and who replace a vehicle once the warranty period expires, we think that some of the consumer mindset has forever been changed as a result of the current economic crisis and wonder when, if ever, the SAAR will recover to the 16 to 17 million level of years past.

We would note though that there are other developments on the horizon that could potentially exert a much larger impact on new vehicle sales. One such piece of legislation is the Efficient Vehicle Leadership Act of 2009, recently introduced by Sen. Jeff Bingaman (D-N.M.). The bill would provide rebates to consumers and assess fees on manufacturers in proportion to a vehicle's fuel economy. Should such legislation be enacted, consumers would be able to sell their current vehicle and use the proceeds, in addition to the rebate provided by the bill, toward the purchase of a new, more fuel efficient car or light truck. We would expect such legislation, should it be enacted, to cause a number of market dislocations – but then again, what else is new?

BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the Automotive Aftermarket industry. BB&T Capital Markets is a division of Scott & Stringfellow, Inc., NYSE/SIPC. Scott & Stringfellow is a registered broker/dealer subsidiary of BB&T Corporation, one of the nation's largest financial holding companies with $132.6 billion in assets.

Disclosures: BB&T Capital Markets makes a market in the securities of Monro Muffler Brake, Inc. and O'Reilly Automotive Inc.

BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Advance Auto Parts, Inc.; AutoZone Inc.; Genuine Parts Company; Midas, Inc.; Monro Muffler Brake, Inc.; O'Reilly Automotive Inc.; Standard Motor Products, Inc.; and The Pep Boys — Manny, Moe & Jack in the next three months.

Advance Auto Parts, Inc.; Midas, Inc.; and Monroe Muffler Brake, Inc. are, or during the past 12 months were, clients of BB&T Capital Markets, which provided non investment banking, securities-related services to, and received compensation from, the aforementioned companies for such services. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report knows the foregoing facts.

An affiliate of BB&T Capital Markets received compensation from Advance Auto Parts, Inc.; AutoZone, Inc.; Genuine Parts Company Monro Muffler Brake, Inc.; and O'Reilly Automotive Inc. for products or services other than investment banking services during the past 12 months. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report know or have reason to know the foregoing facts.

TONY CRISTELLO Senior VP, BB&T Capital Markets Equity Research