(Updates with stock prices, Sonic comment on financial issue)
DETROIT, July 30 (Reuters) - Two major auto dealer groups reported sharply higher second-quarter profits on Tuesday, driven by acquisitions of new franchises and strong sales of new vehicles.
But shares of Sonic Automotive Inc. , the nation's second-largest dealer group, closed down more than 14 percent on the New York Stock Exchange despite the rise in its results, after the company said it was changing the way it accounts for finance contracts. Shares of the other company, UnitedAuto Group Inc. , also fell on the NYSE.
Sonic Chief Financial Officer Theodore Wright said the U.S. Securities and Exchange Commission had asked Sonic to consider "contracts in transit" as accounts receivable instead of as cash. The contracts cover financing for vehicles Sonic sells and involve financing sources such as Bank of America and the financing arms of General Motors Corp. and Ford Motor Co.
Wright said the contracts are collected from the financing sources within an average of seven days, and the change would not affect any "significant" financing ratios such as debt-to-equity or working capital. He also said the SEC did not ask Sonic to change any previous results.
Sonic said earnings rose 40 percent, thanks in part to a chain of Cadillac dealerships it bought earlier this year. UnitedAuto Group said earnings jumped 83 percent as new-vehicle sales increased and profit margins improved.
Their results followed last week's report from AutoNation Inc. , the largest dealer chain, which said its profits grew 20 percent.
All three have benefited from Detroit's Big Three automakers propping up U.S. auto sales through large cash rebates, interest-free loans and other offers. Automakers and dealers expect more than 16 million new cars and trucks will be sold in the United States this year, down slightly from last year.
While new vehicles account for the majority of revenue at dealerships, those sales usually have lower profit margins than used-car sales, vehicle service and financing. The combination makes dealers nearly recession-proof -- the industry as a whole has made a profit every year for the past 50 years.
In the past few quarters, dealers have also received an extra boost from low interest rates. Dealers have to pay interest on the vehicles in their inventory, but with rates low, those costs have gone down. Sonic saved $3.3 million in interest expenses during the second quarter, while UnitedAuto spent $2.2 million less.
Publicly traded dealer groups account for only 6 percent of new and used vehicles bought from dealers, giving them plenty of opportunities to buy privately owned dealerships.
Sonic said it expected to add dealerships with $200 million in revenue before the end of the year, and had enough cash flow to buy dealerships with up to $2 billion in revenue over the next year.
"The market for auto retail acquisitions is so large that transactions are not competitive, and we do not see pricing pressure," Wright said.
Sonic's shares finished down $3.50, or 14.6 percent, at $20.50, while UnitedAuto shares closed down $1.35, or 7.6 percent, at $16.40.