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Published: 4/10/06 6:00 AM
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Share
prices of public dealership groups rose on the New York Stock
Exchange even as GM and Ford stock slid, says investment
banker Sheldon Sandler.
Photo credit: UPI PHOTO/MONIKA
GRAFF |
|
Dealership groups' balance sheets are
healthy
Harry
Stoffer | |
Automotive News / February 6, 2006 - 6:00 am
|
Advertisement
| A $10,000 investment in General
Motors stock three years ago would have been worth less than
$7,000 by late January.
The same-sized stake in
AutoNation Inc., the nation's largest public dealership group,
would have soared to nearly $20,000 in value.
An
investment in UnitedAuto Group Inc. would have more than
tripled.
The comparison illustrates something that
stock analysts have noted of late: The fate of shares in
publicly traded dealership groups is not tied to that of U.S.
automakers.
All public dealership group share prices
have done well lately, even as GM and Ford Motor Co. stocks
slid, says Sheldon Sandler, founder of Bel Air Partners, of
Skillman, N.J.
Sandler, an investment banker who had
roles in some dealerships going public, credits investors with
"an intellectual leap" for differentiating between automakers
and retailers.
"Investors are saying, 'There is a
difference,'" Sandler says. "They have seen the financial
results. They have seen the strong balance
sheets."
That's good news for the dealership groups and
holders of their stocks. But some experts see obstacles to
further share value gains by the public
groups.
Analysts also doubt that other private
dealership groups are willing or able to go public. And
another trend may be on the horizon: attempts by large private
equity funds to acquire dealerships.
"Household names
are looking at this, trying to make the right acquisitions,"
Sandler says. "But it's very difficult" given their criteria,
he says.
Dealerships are being evaluated on their own
merits as good cash-flowing businesses as opposed to quick-hit
opportunities on Wall Street, Sandler says.
John Pico,
vice president of Automotive Advisors of America Inc., agrees
that the number of publicly traded groups isn't likely to
grow, and it could decline if public groups merge or if one or
more is taken private.
"What you see is what you're
going to have," says Pico, a retired lawyer who became a
Dallas-based consultant to dealers. "The glow has worn
off."
In addition, he says, taking a company private
automatically adds 2 percent to the gross profit margin simply
because there are fewer legal requirements and
disclosures.
Pico suggests that Capital Automotive Real
Estate Investment Trust, of McLean, Va., which owns dealership
properties in more than 30 states and leases them back to
dealers, could be a precursor. It was taken private in a $3.4
billion deal last year.
|
New
obstacles
Pico says public dealership groups have
been encountering new obstacles to growth through acquisition.
Sometimes it is resistance by manufacturers to the sale of
certain franchises.
Sandler also sees fewer
opportunities for growth through acquisition. He attributes
that to a scarcity of high-quality stores going on the
market.
"They want to buy more, but they are more
selective. They have sharper pencils," Sandler says. "They
still have to make acquisitions to add to earnings. The
question then is how many good dealerships become available
that they can buy."
None of that is meant to say that
the car business is not a good business to be in, the experts
say.
"Nothing can beat a good private dealer whose got
his own money at stake, his own reputation at stake, his own
ego at stake in his store," Sandler says.
But the
public dealership groups still provide a way for an individual
investor to get in. And since the groups have a mix of brands,
investors are protected even when individual automakers
struggle.
"They particularly like those who have over
the past five years emphasized import dealerships," Sandler
says. "Maybe 80 percent of (UnitedAuto Group's) business is
that of imports."
|
Diversification pays
off
Of course, diversification is a widely accepted
principle of investing. Its merit across the automobile
industry was demonstrated in the latest Automotive
News/PricewaterhouseCoopers Total Shareholder Return Index,
released last month.
The index goes beyond changes in
share prices and includes the value of stock splits and
buybacks and reinvestment of cash dividends.
It shows,
for example, that while there are some very sick individual
automakers and suppliers, investors in global automotive
portfolios still would do OK.
Among car companies
globally, there was one-year return for investors of 9.4
percent. Parts makers worldwide did even better, returning
13.4 percent.
U.S. public retailers, a far smaller
group of companies, returned 7.1 percent.
Given the
cyclical nature of the business, might there even be hope for
big rebounds by the troubled automakers?
Rob
Hinchliffe, auto analyst with UBS Securities LLC in New York,
is not optimistic.
He says the boom-bust cycles of the
past were tied to changes in volume. But this time, GM and
Ford are struggling during times of near-record industry
sales.
Proving again, Sandler says, that for investors
in dealerships, "On the down side, that big public (dealership
groups are) protected against the exposure that those
individual dealers might have."
You may e-mail Harry
Stoffer at hstoffer@crain.com
|
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