In the wake of near panic in the financial markets since Sunday, automotive stocks are rallying today. AmeriCredit is 2.19% higher at $9.95 a share. Asbury Automotive Group, AutoNation Inc., and Lithia Motors Inc. are all trading higher as well. Additionally, the index of large automotive manufacturers is 1.38% higher as talk of a federal bailout loan for the auto industry intensifies.
It is clear that most of the captives and independent leasing companies have backed out of leasing. This was driven by residual losses, increased credit losses, and funding constraints. Relative to anytime in the past 5 years, I would say that this would be the time to be in leasing if you feel that you can manage residual values. Used car values have tanked and are reflected in lower ALG residuals, competition is minimal, so you can “pick and choose” the cars that you want to lease with residual at or below ALG. In addition, if you have access to funding, margins are better than straight retail financing. The OEM risk can be a challenge but there are ways to stay away from cars you think are too risky and only lease cars that have minimal risk. In my opinion, the significant resetting of the market conditions have resulted in the “risk vs reward” of leasing is at a point where if you know what you are doing to manage residual risk, and you can build a diversified portfolio, that leasing could make good financial sense.