Would You Buy A Car From This Billionaire?

Eddie Lampert and Warren Buffett get ready to sell you a ride.

March 24, 2008— -- Two billionaire investors -- Warren Buffett and Eddie Lampert -- are buying into the auto dealership industry even though it faces one of its worst slumps in years. What gives?

A filing with the Securities and Exchange Commission shows that Lampert's investment funds bought about 2 million shares of AutoNation over the last couple weeks. Lampert, the 307th wealthiest person in the world, now holds 37.2% of AutoNation's outstanding shares.

AutoNation runs a chain of car dealerships. It sells new and used vehicles at 245 stores throughout the U.S. About half of its sales come from Florida and California.

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If you can't find what you like at one of Lampert's lots, you can try Buffett's. Berkshire Hathaway, the holding company run by the world's richest person, owns 9.6% of CarMax shares.

CarMax also runs a chain of car dealerships. It primarily sells used vehicles at its 90 dealerships. It was originally developed as a unit of Circuit City.

Although Lampert's investment funds and Berkshire Hathaway declined to comment on their choice of investments, it's easy to see why AutoNation and CarMax seem attractive to these value-focused billionaires. Both are giants in a fragmented industry still saturated with family-owned dealerships.

Based on quarterly sales, AutoNation is the biggest publicly traded U.S. car dealership. CarMax is the fourth biggest and rapidly growing. The company aims to expand its store count by 15% to 20% each year.

Their size creates economies of scale that help them keep costs low and sell cars cheaper than smaller competitors. That offers protection investors like Buffett love.

"A truly great business must have an enduring 'moat' that protects excellent returns on invested capital," Buffett said in Berkshire Hathaway's most recent annual letter.

Car dealers need all the protection they can find during trying times. A hobbled consumer and tightened credit standards are throttling demand. U.S. car sales hit their lowest level in a decade last year and are continuing their slide this year.

But Americans still need to get around, and demand will eventually rebound. AutoNation's Chief Executive Mike Jackson says the Fed rate cuts will help restore sales.

Morningstar analyst David Whiston agrees. He says more consumers could start hitting dealerships as early as the second half of this year. When they do, Buffett and Lampert will be ready.