Upgraded by JP Morgan from Neutral to Overweight

Value.

Unlike most auto manufacturers, which battle high fixed costs that keep them from earning their cost of capital, auto retailers have proved that they can be good businesses. Franchise laws help to keep powerful manufacturers and would-be competitors at bay. Dealers also enjoy considerable support from manufacturers through so-called "floor-plan" financing, a form of low-cost secured borrowing, and other subsidies that reduce working capital needs and marketing costs. Finally, though new car sales account for over 60% of dealership revenues, they make up less than 30% of operating profits. The bulk of operating profits come from higher-margin sales of used cars, parts, and services, helping stabilize dealer finances despite the cyclical nature of new car sales. For these reasons, among others, Morningstar analyst John Novak thinks Group One Automotive (GPI) enjoys a narrow economic moat. And while Group One's profitability and same-store growth has lagged peers', Novak believes that the company's new CEO will improve its execution.

Upgraded by Wachovia from Mkt Perform to Outperform