U.S. clunker law may not dent auto repair chains

By Eric Yep - Analysis

BANGALORE (Reuters) - U.S. auto-repair companies will fend off the impact of a potentially harmful bill aimed at taking old cars off the road, and the closing of GM and Chrysler dealerships will be an unexpected boon for them.

Dubbed "cash for clunkers," the legislation aims to stimulate 1 million new car sales within a year, implying that auto repair chains may lose 1 million potential customers -- a distressing proposition given recent decline in maintenance spending.

Despite support for the bill from President Barack Obama and carmakers, some aftermarket trade groups are up in arms against it, saying such programs will hurt independent auto repair shops.

However, some analysts believe the impact on automotive aftermarket companies will be minimal as the law may not eliminate enough repairable vehicles to hurt repair chains such as Midas Inc, Pep Boys-Manny, Moe & Jack and Monro Muffler Brake Inc.

GM and Chrysler dealership closings are also expected to work to the advantage of the repair companies, thanks to customers looking for new alternatives.

Besides some skepticism about the "cash for clunkers" program's likelihood of success, analysts also point to the bill's limitations -- cash incentives for buying only new vehicles and removing old ones that get 18 miles to the gallon or less -- that effectively restrict participation mostly to light trucks and sport utility vehicles.

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While spending on car maintenance remains limited in a tight economy, auto repair chains are facing new macro trends spawned by changes in the automotive industry.

The U.S. Senate is set to vote on a proposal that will give up to $4,500 to trade in gas-guzzlers for more fuel-efficient vehicles, and last month the House of Representatives adopted a similar program.

BB&T Capital Markets analyst Anthony Cristello said a scrappage bill is likely to have minimal impact, if any, on the automotive aftermarket and repair chains.

"We see more bark and less bite when it comes to 'cash for clunkers' implications on traditional aftermarket participants," Cristello said in a note to clients.

FBR Capital Markets analyst Benjamin Salisbury said if the proposal becomes law, it is expected to be limited in scope so as not to pose a serious risk to auto dealers or parts retailers.

Programs like "cash for clunkers" have multiple objectives, including reducing pollution, stimulating new car sales and even accelerating economic recovery.

LKQ Corp, an aftermarket company that sells salvaged parts, would be hurt somewhat by the reduction in demand for auto repairs, if the number of older cars on the roads were to fall meaningfully, Canaccord Adams analyst Eric Prouty wrote.

In order to meaningfully reduce demand for repairs, the bill needs to be able to get rid of a large number of clunkers.