'Get Your Motor Runnin'

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Automobiles and car parts were one of the catalysts behind the 1.1% rise in Retail Sales in September. Indeed, thanks to some $75.5 billion in sales for autos and car parts last month, this category climbed 1.3% from the previous month, according to The Wall Street Journal. Consumer prices -- led by a 7% jump in gasoline costs alone -- also moved higher, which suggests that demand for cars may be being fueled by energy prices as consumers hunt for a more energy-efficient alternative. The trend bodes well for the auto industry, despite a recent bankruptcy filing by one of the auto industry's clean technology peers

In what's shaping up to be an American growth story, auto superstore CarMax (NYSE: KMX) is playing its cards just right, according to a spotlight feature on the company in Barron's. The company, whose shares are up some 16% since last October, has projected revenues of $10.6 billion for the fiscal year ending in February, and top-line growth is on a similar trajectory. The company is poised for growth, and with the anticipated roll out of additional stores its price-to-earnings ratio - which is below historical standards at 16 times future earnings -- could improve in the not too distant future.

CarMax, which specializes in selling used cars, has been up against a limited supply of vehicles that are in its sweet-spot range of one-to-four years old. Nevertheless, according to Oppenheimer (cited in Barron's) that short supply of late-model vehicles will bottom in 2012 and then rebound. The rise in supply, coupled with an anticipated 40% surge in new car sales, stands to benefit CarMax via more trade-in inventory. The company is expected to seize the surge in inventory by purchasing the vehicles at a discount and passing those savings on to consumers.

Indeed, according to Barron's CarMax is more comparable to a big-box retailer like Costco than other car dealerships given the structure of the business. CarMax employees earn commissions on the number of vehicles sold, not on vehicle values, which resonates with customers. With 113 U.S.-based car dealerships today, CarMax plans to launch another 10 stores in the current year and continue at that pace over the next several years, which should expand the company's 3% market-share of the used-car market.  

Unfortunately, not all of the developments in auto have been as welcome, as a generation battery company took a fall. Electric car battery maker A123 Systems (NASDAQOTH: AONEQ), which went public only three years ago in a $371 million IPO and which today is trading for just pennies, filed for Chapter 11 bankruptcy protection on Tuesday.

The Massachusetts-based battery maker generated some liquidity by selling its automotive business assets to auto-parts company Johnson Controls (NYSE: JCI)-- which is also in the lithium-ion battery business -- in a $125 million deal. A123 also nixed its plans to combine with China auto business Wanxiang Group. Like the now-defunct solar company Solyndra, A123 received nearly $250 million from the federal government in funding.

A123's profit margins were just too weak. The company doesn't seem to have plans to close its doors, however, and has secured debtor-in-possession financing of some $72.5 million from Johnson Controls to continue its operations as it sorts through the bankruptcy process. Nonetheless, it seems like a risky bet to even own Johnson Controls at this point given its exposure to A123. Johnson Controls is trading about 27% below its 52-week high, although shares climbed more than 1% on the news of the A123 deal.

That autos helped to fuel the jump in retail sales is a positive sign for the state of the U.S. economy, and for consumers. Individuals are confident enough to return to the market and replace aging cars with used or new vehicles, helping to fuel the 14.5 million new vehicles that the auto sector is on track to sell in 2012, which according to Barron's is an impressive 40% rebound from recession levels.




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