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Hurricane Harvey Likely To Destroy More Cars Than Katrina: “This Is Bad; Real Bad”

Courtesy of ZeroHedge. View original post here.

Hurricane Harvey's historic flooding in Texas is set to wreak havoc on the auto industry and its insurers with analysts now predicting the storm could damage more vehicles than Hurricane Katrina.  In August 2005, Katrina wiped out some 500,000-600,000 vehicles but William Armstrong of CL King warns that Houston has about 5x more people than New Orleans did at the time.

Hurricane Harvey could damage more vehicles than Hurricane Katrina, driving business to the salvage auctions operated by Copart and KAR Auction Services, CL King analyst William Armstrong wrote in a note.

Katrina damaged 500,000-600,000 vehicles in August 2005, and the greater Houston MSA is five times as populous as pre-Katrina New Orleans.

The cost of dealing with catastrophes can be higher than normal given vehicle extraction, towing and temporary storage and auction locations, though both companies have grown their physical presence in Texas over the last year, which should lower the need for temporary locations.

It may be 2-3 months or longer until damaged vehicles are sold at auction.

Cars

Of course, storms of this magnitude bring not only millions in salvage-related charge offs for the auto industry but a loss of critical "selling days" for one of the biggest markets in the country.  As CNBC points out this morning, Citi analyst Itay Michaeli figures Hurricane Harvey could knock about 500,000 units off the August auto SAAR to be reported later this week.

Given the widespread flooding that will swamp dealerships and kill potential sales, analysts are bringing down estimates for the August new vehicle sales in the U.S.

Citi analyst Itay Michaeli has cut his estimate for the rate of monthly auto sales in August, which are reported on Friday. He estimates Harvey will affect some 125 counties in Texas and about 60 percent of the state's auto sales.

Before Harvey, Michaeli estimated the August sales pace for the country was going to be in the mid-$16 million range. As the storm lingers over the area, Michaeli has dropped his estimate.

"Our analysis suggests that Hurricane Harvey could push this down to the low-$16 million unit range," Michaeli wrote in a note to clients.

In terms of the publicly traded used car dealers, Stephens analyst Rick Nelson notes that Group 1 Automotive has the heaviest exposure to Hurricane Harvey, with ~37% of revenues from Texas, followed by Sonic (~25%) and AutoNation (~21%).  Meanwhile, Autonation CEO Marc Cannon appeared on CNBC this morning to discuss the devastation:

"This is bad; real bad," said Marc Cannon, an AutoNation executive vice president. "Right now, we are focused on making sure all of our employees are safe and taken care of. At the same time, we're focusing on getting all of our stores up and running."

AutoNation's 18 dealerships in the Houston area are shut down. Widespread flooding has not only swamped thousands of buildings in the Houston area, it's likely damaged hundreds, perhaps thousands of new cars and trucks parked on dealership lots.

"We're holding calls with our staff every three hours," Cannon said. "We have reopened our stores in Corpus Christi and Austin, but some of the Houston stores may take some time."

Then, for the 'less reputable' used car dealers, no good crisis can be allowed to go to waste.  As carfax points out, if previous hurricanes are any example, roughly half of the cars flooded by Hurricane Harvey will eventually be sold with no flood label to unsuspecting consumers.

Of course, when the auto OEMs report abysmal sales this Friday they will undoubtedly also tell you how Hurricane Harvey is great for long-term sales because of all the salvaged cars that have to be replaced.


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