Skip navigation
Newswire

As profits grow, auto dealer groups seek respect

By Justin Hyde

DETROIT, Oct 29 (Reuters) - With soaring profits and revenues, the large auto dealer groups are now pursuing a goal that has eluded them so far -- respect from Wall Street.

Four of the largest conglomerates of new-vehicle dealerships -- AutoNation Inc. , Sonic Automotive Inc. , UnitedAuto Group Inc. and Group 1 Automotive -- have reported over the past week an average increase of 42 percent in third-quarter profits, fueled by strong new-vehicle sales and acquisitions of private dealerships.

But all have seen their shares lag well behind the Standard & Poor's 500 index over the past three months as concerns mounted over how long the auto industry could keep luring American consumers into showrooms.

The dealerships contend investors should view them less like automakers, with their large overhead costs and heavy reliance on a growing economy, and more like traditional specialty retailers such as Home Depot.

"The financial model of the auto retailers is significantly different than the auto manufacturers'," said Sonic Automotive President Scott Smith in a conference call with industry analysts on Tuesday. "Even in a tough economy we're well positioned to make money."

Sonic, which owns 188 dealerships, said on Tuesday its third-quarter earnings rose 43 percent as revenues were up 37 percent. Sonic raised its estimates for fourth-quarter earnings and said it was sticking with its targets for 2003 earnings even though it expected new vehicle sales to fall 3 percent.

UnitedAuto also said on Tuesday its third-quarter earnings rose 63 percent, thanks to strong sales at its 126 U.S. and 71 international franchises. It reasserted its earnings guidance for the year.

Last week, AutoNation, the largest dealer conglomerate, said its profits grew 35 percent in the quarter, while Group 1 said its profits rose 27 percent.

Dealership groups have grown this year by buying private dealerships, which make up the vast majority of the $1 trillion market for new- and used-car sales, financing and service.

While new-car sales contribute the majority of revenues at most dealerships, profit margins are slim due to the pricing pressure from automakers and customers. Other businesses provide roughly two-thirds of dealerships' profit, and some of them, such as used cars and servicing, do better when the economy falters.

As a result, auto dealers as a whole have not recorded an unprofitable year since World War II, according to the National Automobile Dealers Association. The large groups have tried to improve on the performance of small dealerships through consolidating "back-office" functions and finding other efficiencies of scale.

"In the midst of these difficult times we've shown that our business is resilient," UnitedAuto Chairman Roger Penske told analysts on Tuesday. "Despite the sluggish economy and the effects of 9-11, we've grown volume and profitability."

Shares of all four companies were up as much as 9 percent on Tuesday.