Car Dealerships:

There’s a group of publically owned dealership companies; PAG, AN, GPI, ABG.  As one can imagine these stocks have performed very well over the last 2 years, as the U.S. recovered and car sales bounced back from dramatic lows.  Dealerships have always been a profitable business with franchisees bestowed the exclusive right to pitch heavily branded wares.

            The public companies continue to buy up family run franchisees, consolidating and cutting out overhead.  I don’t see the OEMs flooding the market with franchisees, so these businesses will rise and fall with the fortune of their car makers.  GPI for example is 30% Toyota, and pretty well diversified for the remaining amount. 

            BUT…  I think you can see margins on new and used cars continue to decline.  With the proliferation of online pricing guides, getting anything above lowest available price is going to prove more difficult for dealerships.  Comparisons are easier, geography isn’t as important, it will be difficult to defend car sales prices. 

            Since I just thought about this in the shower, I have only looked up margins at Group One, and while small their selling margins are in decline.  In up revenue years that’s a strange event.  Thankfully service revenue margins are long and strong.  And while it’s only 10% of revenues, it’s 50% of the gross profit.

            So while I think the, and, etc… will change the economics of buying a new or used car, I don’t think it’s going to be the headwind I would need to short the group.  If cars keep selling these stocks will do well, and when the car stops selling, that’s when you can sell the stocks.

            Even if I think I’m ahead of a trend, it’s important to think about how much impact that trend will actually have.



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