Where Will These Car Dealerships Take You?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The auto industry hasn't gotten much good press lately. The big three American car companies have taken flak for receiving government handouts, individually taking private jets to go beg for these handouts, for consistently losing money by crafting designs that insult the tastes of their intended customers. But at a more grassroots level, there's another group of capitalists in the world of cars and trucks -- the auto dealership. These far smaller companies have to play the hand they're dealt, and lately it's been a pretty hard hand. Let's see how some of the publicly-traded companies in the sector are doing.
Asbury Automotive Group (NYSE: ABG) is one of the largest auto retailers in the US. It's been ranked in the Fortune 500 for most of the past decade, so they're obviously doing something right. I don't like the fact that the depressed nature of auto sales the past few years has driven Asbury's profit margins down to 1.8%, but I like that this is among the highest profitability levels in the industry. I also like that the P/E ratio is 11.09, which is a pretty good deal compared to the S&P and says the company is valued somewhat fairly. I'm a little on edge about the 2.3 price/book ratio, one of the highest in the industry. I've seen a lot of small auto dealers having to sell their merchandise at the deepest discounts ever because they were going out of business, and I worry about a merchandise-heavy dealership that may be tilted too highly in favor of its merchandise and real estate -- two saleable assets that tend to fluctuate in value wildly.
Group 1 Automotive (NYSE: GPI) is another one of the big 5. Operating in 14 states, I'm a little worried off the bat that even with assets as diverse as franchises in the profitable Lexus, Mercedes Benz, and BMW luxury lines more "working class" holdings in Honda and Toyota brands, only operating in a third of the country could be to Group 1's detriment. I'm trying not to be personally offended that even though they have dealerships in Mississippi and Alabama, they haven't seen fit to enter my native Indiana. Nevertheless, Group 1 is one of the larger market capped auto dealerships, pays a 1% dividend and has fair 1.5% profit margins. It also boasts a fairly lean 1.5 price/book ratio, which I admire because it means they've done well to balance their notes receivable and merchandise holdings against their obligations and are being penalized for being in the "wrong" industry. While I don't usually like a 13.39 P/E ratio, in this case I think it's pretty decent. I believe I'll do some more research on Group 1.
Plagued With Problems
Lithia Motors (NYSE: LAD) has ranked in the top 4 of the Most Admired Companies and been well-positioned in the Fortune 1000 list. They have also been plagued with problems and had their growth largely stalled. Operating primarily in the Western US, this is another company that seems under-diversified to take advantage of the full driving potential of the American people. This is an example of the numbers only telling half the story. While I like the 1.3% dividend yield and the industry-leading 2.5% profit margins, I don't like the fact that Lithia may have obtained some of these gains illegally. The company has been fined substantially by the state of Alaska for charging customers illegal document preparation fees, and the company has also been sued for discrimination in the workplace. The price/book ratio Lithia sports and its 10.81 P/E ratio may be reflections of the dangerous nature of this company. If you're up for some risk and potential rewards if Lithia gets its act together, you're welcome to take a ride. But it could be a bumpy one.
At its Peak?
Penske Automotive (NYSE: PAG) is the second largest auto dealer in the world. I like how Penske has a reasonably high level of collision repair focus and holds numerous different brands. It's a well-diversified company overall. I also like how it's international, operating in the robust European economies of Germany and the UK as well as Puerto Rico. I like the 1.9% dividend yield, but I worry that the profit margins of 1.4% are a little flat. The 2.0 price/book ratio says that the company is probably handling its inventory and other assets wisely, but I worry that the profits could fluctuate wildly because of currency concerns. The UK isn't doing that much better than the US is at the moment, and I'm concerned that Penske may be limiting itself by not entering more swiftly-growing markets.
The auto industry has taken a hammering. But the large dealership groups are keeping things together. Depending on your tolerance for risk, there are some companies worth looking into further in this sector.
pongun has no positions in the stocks mentioned above. The Motley Fool owns shares of Asbury Automotive Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!