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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?

 

 

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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.

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Not sure about financing is still profitable.

My dealer is offering 5% interest for a new car, in exchange that he pay for 4 months of my current/old car’s lease payments.

I turned it down to opt for 2.79% financing from BoA, despite losing 4 months of lease payments.

The BoA is a better deal over 5 years (compared to I refinance the 5% dealership loan after 90 days)

 

I hate these dealership. Making car buying so tiring.

 

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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?

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Not sure about financing is still profitable.

My dealer is offering 5% interest for a new car, in exchange that he pay for 4 months of my current/old car’s lease payments.

I turned it down to opt for 2.79% financing from BoA, despite losing 4 months of lease payments.

The BoA is a better deal over 5 years (compared to I refinance the 5% dealership loan after 90 days)

 

I hate these dealership. Making car buying so tiring.

The dealer isn't financing, they are getting paid to originate loan.

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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.

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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

 

 

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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.

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You are right about some of the dealers, you have to be selective.  It is like retail, local economies of scale accrue to those who cluster.  If you look at Asbury the RoE is in the 30s (ROIC in mid-teens) including intangibles. If you look at RoTE you are in the 70s  Lithia has some lower numbers of RoEs in the 20s (ROIC in the low-teens) & RoTE in the 40s.  Asbury is the only one with increasing margins of the group (IMO due to their focused cluster strategy).

 

The new car GMs are not that high to begin with on new cars & thus most of the margin growth for Asbury has been increased service & parts GMs.  The tailwind I was referring to is declining short-term rates which would lower FP financing.  With new cars only 15% of GMs and declining, new cars sales should have a smaller impact going forward.

 

The reason these are selling for the prices they do is the uncertain short-term catalysts but IMO I think the better players should be able to continue consolidate profitably.

 

Packer   

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-A note on the sale price and financing

Last month, we bought a nice garden shed. The sales price included 12-month "free" financing. By paying cash, got a 7.5% discount (!). Three years ago, buying a new mini-van, got a 4% discount from waiving "cheap" financing. The car seller's way of explaining was more contorted but it basically came to a creative definition of cheap or free.

 

I think car dealerships have a future. In the last few years, selling new cars has become a pretense to make money with the package of options coming with the ownership and operation of physical locations selling cars. There are obvious secular headwinds but cars are becoming filled with technological gadgets that will require onerous maintenance and repairs.

 

The models will evolve. Given the perceived headwinds, the significant operating and financial leverage and where we are in the cycle, FWIW I think it is a good time to spot the survivors and the ensuing consolidators.

 

Useful references:

https://advisory.kpmg.us/content/dam/advisory/en/pdfs/the-end-of-car-dealerships.pdf

https://www.nada.org/WorkArea/DownloadAsset.aspx?id=21474857318

NADA comes out every year with a report and long-term trends can be assessed.

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You could start by analyzing AutoNation, AutoCanada, and a few other auto dealership stocks in the UK. Their conference call, presentation etc give you a head start.

 

They don't make a lot of money on car sales, but they have insane margin from service department.

 

You can also check on autotrader.com to see how the cars are priced. For example, a ford F-150 XLT trim has a MSRP of 47000 but they are asking for 31000, if you put in zip code 98029. That's very interesting.

I see big discounts like this for other trucks too. But usually not Japanese cars.

I also remember in the FCAU thread, recently someone there mentioned a twitter account who has spot on analysis on the industry.

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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. 

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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.

Very helpful.  Thank you.

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  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.

 

Where was this said? Thanks!

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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?

 

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  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.

 

Where was this said? Thanks!

 

I don't think any research firms have done the math actually.  For current info, use Cox Automotive data.  I'll do the illustrative math here though: current franchised dealer service share is 30% of ~$500B.  EVs cost ~2/3rds what combustion costs to service.... 100% EV market share would lead to ~$350B market size.  Dealers will get, IMO, ~50% share of that because 1) more OEM parts will be required 2) less independent repair shops b/c of increasing software needs, skills, and fixed costs 3) customers will prefer dealers more b/c of technology component 4) auto repair market consolidation and scale requirements. Happy to go into detail on each. 

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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?

 

Look up the NADA report for specifics.... here's the high level.

 

Selling new cars is ~50% of total gross profit.

 

For new non-luxury, the average selling price is $30k with ~2% gross margins.  F&I ~$1k.  Incentives/fees are ~$1k.

 

For new luxury, the average selling price is $45k with ~8% gross margins. F&I ~$1k.  Incentives/fees are ~$1k.

 

In total, each portion makes up around ~15% of total profits and 1/3rd of gross margin off of new vehicles. 

 

On the latter, I don't know the used market as well as the new market.

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I've bought 8 vehicles in the past 10 years, and my experience is that the new cars are much better bargain than before. It is not uncommon to get 8-15k off MSRP these days for a 35-45k vehicle. I always check on autotrader.com and set the radius to ANY, so I can find the cheapest offering in the country, and know what price target I should shoot for in the local dealership.

 

I've also seen dealerships ripping off customers on service packages. My volvo will be due for the 120k mile maintenance service soon. It is a ridiculous $1175 charge. When I check the exact items they do, it is not that much work. If I just tell them instead to do "oil change, tire rotation, engine air filter and ac air filter change, flush the brake", it is the exact same things for that 120k package, but the total cost of these items add up to just over $400.

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