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tol1

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    US car dealerships

    in General Discussion

    Posted

    In the franchised car dealership business, so I can answer most specific questions.

     

    Here are the popular ones:

     

    1) Is the business model at risk?

     

    No - it's not at risk.  Just changing.  Dealers used to make $ off of selling cars, now they make it from servicing.  Selling direct won't scale because of 1) capital outlays for service facilities 2) laws that are ingrained 3) relationships in rural markets.  Industry headwinds are overblow.  EVs are good for dealers, because they'll get higher servicing market share.  Level 5 autonomous driving is still very far off (20+ years) - Waymo's CEO said it not me.

     

    2) How to analyze? 

     

    What's unique about dealers is that every single store is the same.  A big part of performance is running a store better than someone else.  Look at the unit economics for new, used, f&i, and service.  Look at costs as a % of revenue. Other key things are fixed absorption and real estate ownership.  Being in good, growing, local markets is also very important.  From a valuation perspective, I like to think about it from a private market value standpoint. 

     

    3) Advantages of scale? 

     

    There's definitely an advantage to a point - probably 5 stores is enough scale for overhead, brand, and interest rates to be attractive.  The industry will consolidate slowly.  Because of franchise rules, acquisitions are slower to occur then other industries and more restrictive.  It's hard to buy more than a few rooftops in a local geography, so not a lot of big m&a deals.

     

    4) Pricing and gross margins on new cars.

     

    Consumers have benefited.  The internet has brought prices down.  Gross margins are close to the bottom.

     

    5) Which public dealers are well run?

     

    None - most are average, with Asbury leading the pack.  Berkshire owns the best dealer of scale.

     

    Thanks

     

    I repeatedly hear that OEMs will be beneficiary of EVs as servicing can be done directly with them via software updates.

     

    I wonder how the average gross profit per vehicle breaks down into a) front margin, b) warranty, c) OEM incentives etc on an absolute dollar basis - do you know more?

     

    Also, I see that some dealers open independent used dealerships with low avg prices offset by F&I, warranty etc. - What is your view on a) the sustainable economics of that model and b) the potential to scale as to me it seems any dealer could follow the same strategy?

     

    US car dealerships

    in General Discussion

    Posted

    This an interesting area that I like due the ability to get high RoEs.  There are local economies of scale.  The best performing dealerships (I like Asbury) focus on specific local markets.  In these markets, the dealer can get economies of scale in advertising, floor plan financing & local goodwill.  Only 15% of Asbury's GMs are new cars so they have IMO better balanced revenue mix than most other US dealer groups.  You can also see it in Asbury's high return on tangible assets & high inventory turns.  The lowest margin part of auto dealers is new cars so inventory turns is important if this part of the business is to add to RoE.

     

    IMO the direct model will have a difficult time working.  Tesla's model works because it sells folks $80k cars & that they can cater too & folks know what they want before the go to buy one.  For a more normal priced car, the dealers deals with warranty & service the OEMs are not set up to do.  The dealers also have to make show rooms nice per OEMs spec for no cost to the OEM. 

     

    ecommerce is an interesting threat.  I am not sure how this will work out in the end.  I guess we can see it playout between CRVN (all online) & KMX (mixed model).  From what I see it looks like KMX is eating CRVNs lunch.  KMX has higher inventory turns & has a margin. 

     

    This business is part of where there is coast/flyover divide.  On the coasts alot of threats are showing up but in flyover country these threats do not exist.  Ride sharing is a good example of this.  Since most of the money management is done on the coasts, this IMO is effecting pricing.  Look at CRVN vs. KMX or any other traditional auto dealer.

     

    Given the shape of the current yield curve (near to inversion), I would argue the lower floorplan financing could provide a tailwind.

     

    Packer

     

    Some of the listed dealers have poor ROICs - still my go-to-metric after all. I get the scale effect, but for used cars anyone can enter any market and push prices down hoping to recoup that by selling financing/insurance/warranty etc.

     

    The threat that won't go is the price transparency, not just ecommerce. I just don't see how dealers can escape from that and stabilize gross profits. What are the arguments for gross profits per car to stabilize or even increase again?

     

    Also, car volumes do not grow over the long-term, but move within set ranges. Pricing is set by OEMs. So how can dealers grow their top line?

     

     

     

    Rate increases have already increased the floorplan rates of most dealers, in fact. IMO that cannot be a tailwind. That is why car financings (both new and used) for consumers have gone up as well.

     

    I am not saying that there is a going concern doubt, but given where we are in the cycle, I just cannot see positive developments in the next 2-3 years.

    US car dealerships

    in General Discussion

    Posted

    I think Lithia have been acquisitive, but that alone does not justify an investment. Looking at the fundamentals, why would one buy a car dealer stock now? SG&A and floorplan interest have material impact on EPS. Rates are heading north and dealers have to step up online investments. Overall, valuations have come down in some instances, but IMO that is anticipating upcoming deflated earnings.

     

    Just trying to challenge a potential long view.

    US car dealerships

    in General Discussion

    Posted

    There are plenty of headwinds (ecommerce, transparency for consumers, rising rates etc) and I am looking for any positives. Any bull arguments and data much welcome.

     

    Apart from that, a few questions that arose during my readings:

     

    - I saw that while the sales price per vehicle has grown both for new and used vehicles since 2011/12, gross profit per car has come down for dealers. Who has benefited from the price increase? OEMs only?

    - Also, I wonder how the average gross profit per vehicle breaks down into a) front margin, b) warranty, c) OEM incentives etc on an absolute dollar basis

    - Has there been any news on a potential consolidation among listed dealerships?

     

    As long as dealer laws exist, there is still some value in the dealership. It is increasingly difficult for independent dealers to survive, especially as interest rates on floor plan financing have risen.

     

    New car sales are essentially breakeven. Profit is on financing, add-ons, used cars/trade-ins, and service.

     

    There are still a ton of independent dealerships. Consolidation among those is inevitable.

     

    Dealer laws are being reviewed as we speak and OEMs partially circumvent them with car sharing. Tesla sells cars directly. Another challenge is that OEMs barely sign off new dealer locations anymore. Plus on the used cars side you can open anywhere.

     

    Why is consolidation inevitable? The number of independent dealers has actually grown since 08/09.

     

    Consolidation requires capital and looking at how the dealers are leveraged I do not see a lot of headroom.

     

    Do you have any insights on my questions by any chance?

    US car dealerships

    in General Discussion

    Posted

    There are plenty of headwinds (ecommerce, transparency for consumers, rising rates etc) and I am looking for any positives. Any bull arguments and data much welcome.

     

    Apart from that, a few questions that arose during my readings:

     

    - I saw that while the sales price per vehicle has grown both for new and used vehicles since 2011/12, gross profit per car has come down for dealers. Who has benefited from the price increase? OEMs only?

    - Also, I wonder how the average gross profit per vehicle breaks down into a) front margin, b) warranty, c) OEM incentives etc on an absolute dollar basis

    - Has there been any news on a potential consolidation among listed dealerships?

     

     

    To PMs: Career path - multi- vs single-manager

    in General Discussion

    Posted

    Ladies / Gents,

     

    I have been offered 2 different investor positions in equities at different funds that run a value-based, bottom-up investment strategy.

     

    The multi-manager (MM) total comp is lower initially, but there is a stronger curve in the long-term if the performance is decent obviously. It is not the typical trading platform with tight risk limits. All PMs follow a value-based strategy and everyone runs his own P&L.

     

    The other option is a large single-manager (SM) with the typical Analyst - PM structure, ie path to PM takes long time and total comp as an Analyst is stable across the cycle. I would not work for a "star PM" or even the founder I should note.

     

    The SM has the stronger brand but lower annualized return vs the MM.

     

    My goal was always to work for an experienced senior PM / founder with a strong track record, but one cannot have it all I suppose.

     

    What are your thoughts on either path and your own experiences?

     

    Thank you

    Small-cap ideas publications

    in General Discussion

    Posted

     

    Thanks - familiar with most of the suggested. I should have been more precise: I was looking for a regular publication that entails small-cap investment ideas by professional investors.

     

    EVA and goodwill

    in General Discussion

    Posted

    I always wondered if EVA is not flawed for companies with large goodwill on their BS:

     

    Before adding the various economic profits you commence with the existing invested capital (IC). If the IC is a material part (due to a large goodwill) of the total EV, any operating downside going forward will have a minor impact. Wonder if anyone has come across adjustments here.

     

    Fwiw, I usually add goodwill to the IC if the brand, customer relationship, technology play an important role in the operations of the business.

     

    Valuation methods yielding opposite outcomes

    in General Discussion

    Posted

    I always wondered if EVA is not flawed for companies with large goodwill on their BS:

     

    Before adding the various economic profits you commence with the existing IC. If the IC is a material part (due to a large goodwill) of the total EV, any operating downside going forward will have a minor impact. Wonder if anyone has come across adjustments here.

     

    Extrapolations in EVA model

    in General Discussion

    Posted

    Am not a big fan of "forecasting" beyond 5+ years, but looking at a usual EVA valuation.

     

    How do you guys usually derive invested capital, nopat etc for the long-term? Do you assume ROIC will stay constant or do you let IC / nopat grow at certain rates?

     

    Keen to hear your thoughts on above.

     

    Thanks

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