AN - Auto Market Troubles? A Kodiak Bear Thesis -

AN - AutoNation

This is my personal opinion, do your own research, yada yada yada.

Im going to keep this brief and continue to add more as the research continues. Im also going to update the post with current indicators as they move so it is easy to see any trends all in one place.
Ive been looking into the auto market for the last few weeks and I believe there are challenges that the market has not priced in yet.

My opinion is that the auto industry is due for a haircut due to macro conditions. (If you are still not completely up to speed on the current macro landscape, start with the inflation leading to stagflation post then head over to the stagflation leading to recession Kodiak Bear Thesis. I know you have to chew through them, but the analysis in the comments from many members in Valhalla is where the real value comes from IMO.)

There are a few statistics I want to share about the auto market that led me to AN.

American’s currently hold over 1.4 trillion dollars in auto loan debt. This has continued to climb since the GFC in 08. For a comparison, this number in 2010 was 670 billion.

Of that 1.4 trillion in debt, 46% are underwater.

That surprised me, but even more so when you consider that used cars YoY have been up over 30%.
According to bankrate here is the breakdown of average car payments currently in the US.

Both new and used monthly payments show double digit percentage increases YoY, this is obviously concerning because regardless of what heppens in the economy, Americans will have this payment for awhile. The average maturity on an auto loan right now is just shy of 6 years. While the average purchase price has climed to $37k, a new ATH.

As we know, American’s personal finances have been getting squeezed from inflation. We now have the lowest saving rates in the US with the highest ever consumer debt. We can see this already impacting the auto lending world.

According to Experian as of last month, Sub prime auto defaults are at the highest levels since covid April 2020, while the broad auto lending market just saw its first increase in default rates since April 2020.

The federal reserve also plays a big role in the auto market. Everytime the fed raises the fed funds rate, auto interest rates obviously move up too. This is the main tool they use to lower demand and it instantly affects the auto market.

As I was trying to figure out how lenders could easily roll old loan balances into new loans on a car, usually one of the fastest depreciating assets, I came across something interesting in the Dodd Frank Act of 2009.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was inacted in 2010. You can read about it here:

There are alot of pieces to Dodd Frank but the main purpose was to limit risk in our financial markets by inacting widspread regulations and opening up transparency for the consumer. One of the key pieces was to regulate the preditory lending practices we all saw in 2008, think “ninja loans”.

What I thought was interesting is these regulations hit nearly the entire financial market, except the auto industry. Its as if we cant help ourselves. The auto industry and lending practices are largely regulated on a state by state basis and leave most of the oversight to the lender.

I believe this has created a perfect storm due to the fact that most car dealerships in America are now also in house auto brokers. Meaning the dealership that needs to sell cars to survive is also the lender setting up the loans and is also supposed to be the one oversight body protecting the consumer. This is a pyromaniac fire chief scinerio.

Quite frankly it is the wild west out there in the auto lending world. I came across a number of ads looking for data like this one:

I think this has largely gone on due to obvious lack of regulation, fiscal stimulas, and easy money monetary policy, as well as the securitization of auto loans. Securitization is the process of packaging lots of small loans into a basket of that can be bought and sold on the open market.

The main pain point with securitization is the lenders that are writing the loan typically dont keep them on their own balance sheet. They are sold quickly and the risk is transferred. This is a sweetheart deal for the lenders and dealerships. Auto backed securities issuance has been very popular lately. YTD is up 20% YoY
Volkswagen just today announced they are preparing a 1 Billion dollar issuance on 47k leased vehicle contracts. Leased, I didnt know that was something that would be put in a bond but here we are. Ofcourse this only works well until it doesnt, as defaults rise, these auto backed securities fall, and new issuance gets more difficult due to risk premium.

AutoNation - AN
AutoNation is a big player. 300 dealerships nationwide. When thinking about an auto market play I like AutoNation for a few key reasons.

#1 -

AutoNation’s bussiness has been booming due to inflated used vehicles prices. Throughout the industy margins have been very strong. However, I do not believe that is sustainable and I also dont believe any retail company should be beating the S&P 500 in 2022. AutoNation is -8% YTD, compared to the S&P 500 sitting at -15%.

#2 - AutoNation’s rental car exposure.
AutoNation owns Spirit Rent A Car, Value Rent A Car, and Snappy Car rental. I believe the rental car business will also continue to feel the effects of the macro landscape.

#3- Big insider selling.

One of AutoNations 10%+ equity owners has been selling pretty consistently these past few months. The most recent on 5/23 was worth 29 Million.

I believe the auto industry will not be immune to the economic challenges the country faces and should be priced accordingly.

There are couple main risks I see with this play. As mentioned above, used cars have been highly inflated, I believe US housholds start to become less enthusiastic about purchasing new vehicles based on affordability, leading to softer demand, but the supply side is harder to discern. Right now inventory is awful, and could potentially stay there as new vehicles feel the pain from material shortages. AutoNation has done well with this so something to watch.

There is also risk being bearish on a large relatively healthy company. The financials dont look to bad right now due to their recent windfall, and their P/E ratio sits at 5.72.

We also have a great bull case from @jjcox82
That can be found here AN the giant of what is Automotive retail
This is best case scinerio as we can fully understand both sides of this trade. I appreciate you bringing your experience and great perspective @jjcox82

I dont expect AN to go bankrupt, I just think given the challenges the country and auto industry faces, moving foward AN’s evaluation will change. Cars will continue to become less and less affordable as monthy budgets get squeezed and monthly auto payments continue to rise from the feds tightening cycle. If 46% of all auto loans are currently under water, that means a large number of Americans may not have access to the credit necessary to roll over negative equity, meaning they will be forced to stay in the vehicle, taking them out of the market completely. I also anticipate the thick margins they have enjoyed will start to decline from higher gas prices transporting vehicles and the COGS increasing as they continue to replace inventory.

Im playing long puts, very light position currently. Looking to continue to average into July / October strikes. This play may take time to develop, I think the strongest indicators will be fed funds rate, auto loan delinquencies, and used vehicle Inventories. I will be using these as a temperature gauge for position size and timing.
OI on the chain is weak, but as Ive learned from other plays this year, that can change quickly.

Looking forward to hearing and thoughts.


Awesome as always @TheHouse I do generally agree with your general thought process as the house of cards comes crashing on Auto as well as the rest. I personally just believe it is further down the road than in coming months. To the financing aspect as noted there are lots of auto used dealers that do their own financing but AN is a juggernaut on the new side and financing is a large revenue stream in general.

Also we need not forget new car dealers also generate large amounts of revenue from service and parts revenue. In turn as the inability to buy new cars the rising cost of labor and parts availability goes up the fixed operations side sees an increase in profits.

Maybe someone more advanced can merge these two threads. But great perspective from you as always


Got it added in there, I love having an active bull case working in tandem. I think you bring up some great points, I think it will be valuable to dig through the financials and see how all of their different categories break down. That should give us a better idea on how exposed they would be from primarily the car sales side of the business. Ill post what I find,
Thanks again !


Agreed the best trades always have info and aspects from both sides. I think with that we can time the ups and downs may the right times. Another ticker to watch for those interested in this sector is LAD. Has had huge EPS and could move simultaneously with AN. I’ll actively update as new auto data comes available IE rate changes etc.

I like the direction of the play just havent noticed any hints to the auto slide we are small peanuts compared to these guys but we do have 9 stores that are all currently still on pace to surpass 2021 record profits. Although I personally hope the downturn is not the case it affects my daily life in the auto industry.


Thanks for your opposing insights guys. It really helps to think about companies more objectively. With that being said, I have to agree more with Okdig’s POV given the current data available.

Looking at their latest Balance Sheet, it looks like they know what they’re doing. They’ve doubled their cash from last year and their expenses/liabilities appear to be under control. The insider selling makes a lot of sense to me given the abnormal prices this past year - it would seem unwise NOT to sell stock when it’s clearly at all time highs.

In terms of the debt, I think it’s important to monitor cash flow to expenses. If, for example, AN has enough cash and cash flow to “weather the storm”, then it’s not really a major concern. They survived '08 so I’m hesitant to bet against a company like this. I’d wait to start to see how the industry adapts to demand falling, from which we could get a more clear trajectory.

I’ll be looking more into how the loans are structured in the back-end in the meantime.


Going to try to take a look at AN first quarter earnings and financials to see if there are any kinks in the armor.

But one thing it made me think of there are essentially 2 main variable expenses that a automotive dealer can have that could cause profits to be eaten up.

  1. floorplan expense-floorplan is when a dealer acquires a new or used car they essentially are floated the note for the car so basically a dealer goes to the auction and buys 100k worth of inventory it goes on their floorplan as to not eat up their capital. Nearly every new car dealer floors their new cars. Most new car OEMs give some kind of floorplan assistance. As in normal times you are talking millions and millions of dollars of inventory. However currently with minimal inventory levels floorplan expense is relatively non existent on new cars. Now here is the tricky part when comes to used cars. A lot of liquid dealers don’t floor their used cars. These are the really profitable ones. That essentially means their used inventory is unrealized cash could be profit or loss. Now I’d assume and going to look more into it. That AN floors their used cars as well as a dealer of their sized would have to be in the billions of they were all liquid. This can play to the downside if floorplan rates creep up drastically. So dealers average cost of inventory is higher than ever because of elevated car prices. So if rates trend up as well it cuts margins drastically from the juice they pay on the cars.

2). Advertising. Currently you don’t have to advertise anything. A year and a half ago you had your cut price ad leader cars you lost money to get people in the door. And most mid size dealers are probably spending about 500 dollars per car sold at that point. In current times that number is half. However with GPU being so elevated it’s an even smaller % of the total revenue per car. Right now advertising is a non existence expense so far. And that is continually one of the largest expenses dealers have.

The majority of the other costs or losses would be incurred on fixed expenses. iE payroll facility etc. but those are essentially the two main variables that can play an affect on profitability.

The doomsday scenario here is elevated prices that dealers acquired at the peak paying increased floorplan rates and the used car market crashes. It’s essentially having your favorite ticker take a knife when you bought at the top. Then in turn you have water in your inventory and can’t unload it unless you take a loss or keep paying the inflated interest. I’ll update more when I can get closer look at their financials


Found an interesting article in regards to this aspect of it. It isn’t about AN but same segment. I do think AN is a much more solid financially example.

But it would seem to me that LAD would have more downside. I think we will see a drop in this sector at some point. So want LAD to be on radar as well as I think it could be even more affected.

This leads me to believe they are heavier financed with inventory properties etc.


This is awesome, going to check them out tomorrow before the bell. Ill prob play it similar to the airlines I have been playing, Delta and American Airlines. Strong and weak as they both bring their own own different set of opportunities.
I appreciate it @jjcox82 !


Looking like the market is bringing this down, planning on taking some profit on this position this morning.


Fully out of this position, made 90%, appreciate the work @TheHouse. Plays still viable and worth watching.


Very nice, I played it nearly identical this morning. I think this will be a great off and on play for the next few months now that it is moving. Cheers homie


The Automotive market continues to stay hot from my perspective. Currently June is pacing to be a record month for us including last summers scorching auto numbers. This is typically a strong signal for consumer demand which would be reflected in inflation being elevated.

Looked to enter 120c on AN today as I fully expect Q2 earnings to be a banger but they strangely don’t have a chain from July 15 to October. With earnings on 7/19 I’d want to be after that.

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Is there a way to dig deeper into bank’s consumer debt to see which ones have the largest exposure to sub-prime auto loans? I do believe the macro conditions will impact dealerships and auto groups like AN, but where I believe it will get the messiest is these “roll-over” auto loans where people are financing the remaining balance on their old shit box as they buy more car than they can afford. Like this thread mentions, the auto groups write the initial loans, package em up in batches, and sell em to banks; sounds like same dance, different tune to me. Banks with outsized or significant exposure to auto loans could see some real bad results come Q3 ER.

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This is a good play to keep an eye however this isn’t quite the subprime mortgage fiasco situation.

Most dealers don’t perse write the auto loans then sell them. They work more as a lending tree type structure. The loan gets submitted to a few lenders and the most aggressive lender gets the loan right from the start. Strangely enough subprime auto loans typically require more stips (stipulations) proof of income residency verification of employment customer interviews etc. than most mortgages.

Now where the subprime lending play could come in is if inflation and cost of everyday living continues upward you will see a rise in repos or loan delinquency in this sector as it primarily hits hardest at folks who live paycheck to paycheck to pay the subprime loans. Some of which are rates in the upper 20s.

Probably a different thread needed for research on this I may start if I get a chance. Need to figure out which of these lenders are publicly traded first. But to name a few big ones

Ally financial
Capital one
Wells dabbles in subprime.

I’ll look more into this.

The rollovers on the loans won’t really start to hit til the actual assets securing the loans start to depreciate. There has been virtually no decline in used car values in last 60-90 days.


According to Experian, these are the top ten new car lenders:

Used Car Lenders:

I’d focus on Capital One (COF) since their auto loans are a decent portion of their total loans outstanding:

Plus they have a decent amount of overlap in the markets AN services:

We own and operate franchised automotive stores in the United States pursuant to franchise agreements with vehicle manufacturers. During the three months ended March 31, 2022, approximately 62% of our total retail new vehicle unit sales was generated by our stores in Florida, Texas, and California.

-AN 10-Q

-COF 10-Q

COF auto loan delinquencies are pretty healthy so far


Really should focus on subprime sector of the lending as well. Which is primarily Cap ones segment. Santander is also Chrysler capital and they write tons of subprime new car loans which are heavy depreciaters.


Retail sales dropping this month, led by a decline in auto sales.

New vehicle gross profit per vehicle retailed was $6,112, up $3,373 or 123% compared to the year-ago period.

With supply side constraints helping their profit margins, going to be an interesting quarter to watch.

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As we discussed on TF current Q2 shouldn’t reflect any damage to AN or auto dealers as whole as supply issues have been a thing for last two years. If their GPU remains strong like you noted. They will be largely profitable.

Demand hasn’t lessened essentially because of back log in retail sold orders that continue to flow in from OEMs.

F for example has 90 percent of their model lines shut off for ordering period from build up of retail orders basically to play catch up. This still drives dealers such as AN profit as those are sales that have not be accounted for yet. That likely lasts til august and there are no signs of supply relief on horizon currently as my store currently has about 3 percent of traditionally inventory levels. And nothing sits stagnant.

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Going to post these here:

Interesting article here in regards to demand not slipping but inflation eating into profit margin.

Also note the end of article where default rates on ford credit loans are seeing an increase. As discussed in the COF thread.

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