August 3, 2020 BARRON’S 23
specific catalysts to lift sales. CarMax,
the largest used-car dealer, has the
wind at its back as used-car prices hit
record highs and sales strengthen as
shoppers tighten their grip on their
wallets, buying pre-owned, rather
than new, in the recession.
Shares of AutoNation, the largest
national dealership chain, have more
than doubled off their 52-week low, to
a recent $52.53, but still trade at just
nine times estimated 2021 earnings.
Group 1, a regional chain that has in-
vested heavily in parts and service,
looks even cheaper, at seven times
2021 profits, or around $90 a share.
CarMax, at a recent $98, is pricier, but
that’s because it’s at the center of the
hottest retail trend: used cars.
None of these multiples comes close
to those of online newcomersCar-
vana(CVNA) andVroom(VRM).
Carvana, dubbed the Amazon.com of
dealerships, is up 67% this year, while
Vroom, which went public in June, has
more than doubled from its initial
offering price of $22. Revenues are
surging for both, as online car buying
accelerates with the pandemic. But the
stocks don’t offer much for value in-
vestors, trading at tech-stock multi-
ples of revenue, with no profits in
sight for years.
“The digital upstarts are addressing
a pain point for the consumer—going
to the dealership and sitting through a
tough process,” says Bank of America
Securities analyst John Murphy. “But
a lot of people will still shop for cars at
brick-and-mortar stores.”
While dealerships face a tough road
back to 2019 levels of sales and profit,
monthly trends show signs of a recov-
ery. New-car sales, which were run-
ning at an 11 million annualized rate in
the second quarter, hit a 13 million
pace in June. Production has stabilized
after nearly halting in the spring. And
financing is exceptionally cheap.
These trends helped every major
dealership report a profit in the sec-
ond quarter. And while new-vehicle
sales are down sharply, year over
year—partly due to lack of inventory—
wholesale auction prices for used cars
recently hit record highs.
That’s a good leading indicator for
new-car sales, says Michael Ward,
automotive analyst for The Bench-
mark Co., a boutique research shop.
Higher used-car prices cut the cost of
new-vehicle transactions (since buyers
get more for a trade-in), and lower
lease payments by boosting a vehicle’s
“residual value” (its worth at the end
of a lease). “I’m very positive on the
dealerships overall,” says Ward.
Dealers have far more leeway than
manufacturers to cut costs, and they
are using it to turn a profit. Capital
expenditures as a percentage of reve-
nue are less than 1% for dealerships,
versus 6% for manufacturers and sup-
pliers, says Ward. Dealers have long
maintained an average gross profit of
around $3,000 per vehicle. “It’s prob-
ably the best business in the auto sec-
tor because of its low capital inten-
sity,” he says.
Coming out of the Great Recession,
dealership stock multiples expanded
by 20%, Ward adds. A similar bump
should emerge as the industry comes
out of this downturn.
AutoNation’s shares have been ris-
ing after the company beat consensus
Car Dealerships Still
Have Some Spark
Investors and car buyers have gravitated toward online platforms.
But for investors, at least, the better deals are at the lot. Here’s why.
“I’m very
positive
on the
dealerships
overall.”
Michael Ward
N
ot many people relish the
car-buying process: The
glad-handing, the price-
haggling, the warranty-
pushing are all hurdles to
enjoying your new ride.
The dread of doing all that
behind a mask has many car buyers—
and investors—increasingly shopping
online. But for both, the real value still
might be found at the dealerships.
Traditional dealerships, such as
AutoNation(ticker: AN),Group 1
Automotive(GPI), andCarMax
(KMX), continue to have some spark.
Each offers a compelling play on a
recovery—bumpy as it’s likely to be.
AutoNation and Group 1 are both con-
trarian ideas, hinging on company-
By DAREN FONDA
estimates in the second quarter and
announced plans to build 20 used-car
dealerships over the next three years.
CEO Mike Jackson says the pre-
owned market will consolidate into
large dealership groups, as consumers
increasingly shop online at companies
with national brands. “We have the
digital capacity that matches anyone,”
he says.
AutoNation also has invested in
digital dealerships, taking a 7% equity
stake in Vroom, worth about $440
million.
W