Profiting From the Failing Auto Industry

I’ve been following the economic gyrations of our auto industry with some interest.  Fifty years ago, the US auto industry was the pinnacle of success.  Now, the remnants of a once mighty industry are being torn apart… like vultures ripping up a dead animal carcass.

So who wins in all this?

Of course the lawyers do… (feel free to insert your canned lawyer joke here).

Aside from the lawyers, there’s a small group of companies benefiting from the automotive industry turmoil.  I’ll tell you who they are in a moment.

First, let’s take a look at our favorite Dow Jones Industrial Average component… General Motors (GM).

With typical automotive flair, GM is keeping the world on a see-saw of news.  One moment they’re threatening bankruptcy.  The next they’re reaching agreements with debt holders.  Today, it looks like bankruptcy’s a certainty.  The stock chart looks like the scribbles of a two year old with an indelible marker.

Up one moment, down the next.

One of GM’s biggest competitors – Chrysler – is already in bankruptcy. Ford, the lone survivor of the big three, seems to have sidestepped the turmoil.  You already know how highly I think of Ford.  You can find my most recent article on them here, “Time To Buy Ford… Are You Crazy?” 

To understand what’s truly happening, we need to look at recent news on car dealerships.

Chrysler’s cutting around 800 dealerships.  GM’s in the process of slashing almost 2,000 dealers.  Ford’s already done the dirty work.  In the last few years, they’ve cut more than 600 dealers.  Rumors are they’ve got another 100 or so in their sights.

Dealerships are being closed across the country.

But the dealership woes aren’t limited to the big name brands.

Other smaller car dealers are struggling and closing as well.  Just take a quick drive through a few of the older automotive areas in your city.  The sight is frightening.  It’s like a ghost town.  Empty lots, boarded up buildings… weeds.

Why are the smaller dealers closing?

For the smaller dealers, it’s all about credit.  Due to the credit crisis, getting a car loan is near impossible.  If nobody can get a loan, nobody can buy a car.  Add to that concerns over housing, foreclosures, and job losses and you have a perfect storm pounding the smaller dealers.

So, who’s the winner in all this?

It’s the automotive service companies.

Take a look at Monro Muffler Brake (MNRO).  The company runs 720 stores focused on providing services for automobiles.  They do a whole litany of things.  Everything from break repair to air conditioning services.

Many car owners used to have their vehicles services by their dealer…

In the next few months, as thousands of dealers close up shop, customers will be looking for new places to take their car.  And Monro is certain to pick up a number of them.

Trust me, it’s not going to happen all at once.  The closings will take time.  But eventually the migration will happen.  Customers will slowly find their way over to service companies.  And those companies will see improving revenue growth and, of course, higher margins.

Monro’s been on quite a run lately. The stock’s nearing its 52-week high of $29.40.  I take it as a great sign the stock’s showing strength in an otherwise weak economic environment.  All of the key moving averages are pointing toward a continued move higher.  Consider Monro for your portfolio.  Pick it up on pullbacks… but don’t wait too long.  I think this stock trades over $30 in no time.