AutoNation Becomes Target as Buffett Moves In

According to Ward Auto, a top research firm in the car industry, Van Tuyl Group had revenue of almost $7 billion last year. This came through sales at 72 dealerships. AutoNation produced revenue of $17.5 billion via 221 dealerships. AutoNation did not make much money — only $376 million. Selling cars is a mediocre business, at least as measured by profit and loss (P&L).

AutoNation does have little to show in the way of investor value for its $17.5 billion in sales. Even trading near a 52-week high, during one of the great sales growth periods the in the history of car and light vehicle sales in America, AutoNation’s market capitalization is only $6.1 billion. The reason for the relatively low value may be that some skeptics believe car sales in the United States have peaked. If so, Buffett has made a bad deal and AutoNation is a poor investment.

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AutoNation has done a fine job trumpeting itself. The public company’s management recently reported:

Reported retail new vehicle unit sales in September 2014 were 24,081, an increase of 16% as compared to September 2013. September 2014 reported retail new vehicle unit sales for AutoNation’s operating segments were as follows:

• 7,356 for Domestic, up 13% versus September 2013,
• 11,599 for Import, up 18% versus September 2013, and
• 5,126 for Premium Luxury, up 17% versus September 2013.

On a same-store basis, reported retail new vehicle unit sales in September 2014 increased 14% as compared to September 2013. Industry reporting for September 2014 includes one more calendar day than for September 2013.

In many ways, the numbers are impressive, since overall car and light truck sales in the United States rose only 9.4% to 1,246,006.

Buffett’s decision mirrors the methods AutoNation has used to grow, part of which is to buy smaller dealers.

One of the arguments for owning multiple dealers is that there are benefits of scale. While that may be true, each dealer has its own geography and independent operations. One of AutoNation’s problems may be that, like all retailers with multiple locations, some must perform much better than others. The company’s thin margins are some indication that is true.

U.S. car and light truck sales should reach 16.5 million in 2014. Since the year-over-year improvement has increased most years since the recession, many of the older cars in America have been replaced. That underpins the argument that sales may slow. Perhaps a more convincing position for pessimists about the industry is that younger people have not developed the appetite for car ownership that the Baby Boomers have. That generation edges closer to extinction as its members moves into their 70s.

On paper, AutoNation should be a good target for a company, perhaps Buffett’s, which believes consolidation in the industry is likely. However, it may be an industry that has its best years behind it.

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