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

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.

SALES STEROIDS

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.

As U.S. auto sales slumped in May, Germany posted a 40 percent rise spurred by a program launched in February that paid 2,500 euros ($3,300) to scrap old cars, although investors were skeptical whether the demand would be sustainable. [ID:nL3474996]

BB&T’s Cristello said the U.S. version of the bill is far less likely to generate similar results, as the German program was driven by impending changes in motor vehicle taxes and uncertainty about the duration of the program.

He also argued that removing 1 million cars from the 245 million-odd vehicles on the road will not “move the needle enough” to hurt the aftermarket.

A clunker is a car that people are putting a minimal amount of money into anyway and spending the least to keep on the road, he said, implying that it is probably not much of a potential aftermarket customer either.

However, Britain said its scrappage scheme succeeded in boosting new car orders by 35,000 since it was announced in April, while Japan’s Nissan raised its UK production plans on demand boosted by European scrappage schemes.

“Overall we see little impact to the auto parts space from this legislation, though on passage, concerns could cause a short-term trading impact to the auto parts aftermarket sector,” Stifel Nicolaus analyst David Schick wrote in a note to clients.

Schick said cash-strapped consumers would not be quick to take on the incremental cost of a new car in exchange for $4,500, and given rising unemployment they are likely to hold on to older vehicles that are in drivable condition.

UNEXPECTED GAINS

Car maintenance companies such as Monro Muffler and Midas have indicated that the closures of dealerships of major carmakers like General Motors and Chrysler LLC are working to their advantage and adding to higher store traffic.

“We have an opportunity to further expand our market share and grow our customer base in an economical and cost-effective manner as a result of these changes in the auto industry,” Monro’s Chief Executive Rob Gross said on a conference call.

BB&T’s Cristello said “the opportunity is certainly there” but it is up to each company to fill the void left by dealers, even though the benefit is difficult to quantify as a lot of dealerships have not closed yet.

Monro Muffler and Pep Boys are trading near their year-highs, helped by cost cuts and falling new-car sales, and Midas has seen a 44 percent rally in its shares in the last three months.

Editing by Mike Miller and Gopakumar Warrier

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