| BUSINESSWEEK ONLINE : AUGUST 9, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR
Wanna Test-Drive a Dealership Stock? Even if you're not in the market for a new or used car, the auto industry has something else you might like to buy: stock in an auto dealership. A growing number of publicly traded dealership companies are snatching up mom-and-pop outfits, creating greater efficiency and placing more emphasis on higher-margin servicing and auto-parts businesses. The trend's boosters say the consolidation will help big dealerships weather future downturns. Meanwhile, they have hit some bumps in the road recently, so their stocks are a bargain. ECONOMIES OF SCALE. The new-style dealership companies typically acquire a leading dealer in a market and leave its management intact. Then they buy other local auto-sales operations, handing management over to the first team and consolidating overhead, supply, and advertising expenses. These companies have ''recognized the opportunities to make economies of scale and generate strong returns for their shareholders,'' says Tom Thomson, an auto-retailing analyst at First Union Capital Markets in Richmond, Va. The largest company in this mold is New York-based United Auto Group (UAG), with $3.3 billion in sales (table). While UAG's stock tumbled 75%, to 5 3/4, early this year on management woes and has yet to recover all the lost ground, analysts are upbeat. The company put a new team in place in May, naming former race-car driver and industry insider Roger Penske chairman. UAG recently posted a 7.5% gain in its second-quarter net profit, to $8.6 million, and earnings are expected to grow from 98 cents a share this year to $1.16 next year. ON THE REBOUND. Group 1 Automotive (GPI) in Houston and Sonic Automotive (SAH) in Charlotte, N.C., are also showing strong earnings growth as operating margins improve. Group 1's margins have risen to 3.1% this June from 2.5% the year before, according to Jordan Hymowitz of BancBoston Robertson Stephens. The company is getting more of its profits from its servicing business as well as products such as auto insurance and financing. Group 1's second-quarter profits rose nearly two-thirds, to $9.2 million, while Sonic's more than doubled, to $10.1 million. For the year, Group 1's earnings per share are expected to hit $1.44 and then rise to $1.73 next year. Sonic's earnings, forecast at $1.10 per share this year, should hit $1.39 in 2000. If this trend continues, these companies should provide engines of growth for investors. By David Rocks _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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