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Respect at Last for the Big 6

A few years before selling his top-ranked Cadillac dealerships to Sonic Automotive, Don Massey said he'd never do that. New-car stores have no business being on the stock market, Massey declared. If the stock is down, the staff gets depressed and sales drop. If the stock goes up, you're making money on it and nobody gives a damn about selling that extra Sedan De Ville or service contract. Whatever

A few years before selling his top-ranked Cadillac dealerships to Sonic Automotive, Don Massey said he'd never do that.

“New-car stores have no business being on the stock market,” Massey declared. “If the stock is down, the staff gets depressed and sales drop. If the stock goes up, you're making money on it and nobody gives a damn about selling that extra Sedan De Ville or service contract.”

Whatever changed his mind — perhaps a prod from GM or the freedom of not being a hands-on owner anymore — Massey did take a $1 billion cash and stock offer from Sonic in 2002 for his 12 dealerships. Sonic stock has more than doubled in value since he did.

And no one at the megadealer's Charlotte, NC headquarters is complaining that the team is coasting while the stock price has risen to $25 as of April, from $14.70 a year ago. What's more, Sonic is not an aberration among the six major publicly owned new-car dealerships. The five others have also enjoyed stock-price appreciation, after six years of investor disinterest and depressed prices that fell far short of the multiples-to-earnings per share of most other growth industries.

“We were expanding like topsy,” says Lithia Motors Chairman and CEO Sid DeBoer. “But Wall Street couldn't understand how deaerships could make money even when new cars had down cycles. So Lithia's stock and the stocks of the five others sat there at the prices of our 1996 and 1997 IPOs (initial public offerings).”

Meanwhile, though most of the auto makers at first coldly greeted publicly owned dealership chains, the new breed of megadealers began a buying spree using newly issued stock and credit lines.

Paced by AutoNation and its founder, H. Wayne Huizenga, the group went after “best practices” stores in top growth markets — principally in the Southeast, Southwest and Northwest. Blue sky was paid to secure top-flight privately owned groups and single-franchise growth points handling BMW, Cadillac, Infiniti, Honda, Lexus, Nissan and Toyota, among others.

AutoNation, Group 1 Automotive, Sonic and UnitedAuto Group competed for top groups in many growing markets. The Maroone group in southern Florida went to AutoNation, as Mike Maroone joined AutoNation as president. In Denver, it purchased three groups at once, including that of Denver Broncos star John Elway.

The buying wave had started with Asbury Automotive as a privately owned collection under former Ford and Subaru executive Tom Gibson. Nine “platforms” were assembled by Gibson before Asbury became the last of the six big dealership chains to go public in 2002. The platforms — consisting of geographically clustered stores — included Nalley in Atlanta, McDavid in east and central Texas, Coggin in northeast and central Florida and the Plaza all-luxury mall outside St. Louis.

“Our plan always was to go public,” Gibson says, “after building a network of nine platforms first and then adding to them like spokes on hubs.”

This strategy has been deployed by Group 1 and UnitedAuto Group (UAG) in metro markets and by Lithia in midsize cities, adding brands on existing centers rather than plunging into new markets pell-mell as before.

Have the public megas run out of gas because they owe so much money in the aftermath of the 1997-2002 buying spree? A March 29 Business Week analysis says yes. But it fails to recognize increased earnings and revenues in 2003, plus real estate initiatives like UAG's luxury-brand mall in booming Scottsdale, AZ, outside Phoenix, and purchases by UAG CEO Roger S. Penske's affiliated group of a Cadillac store in Torrance, CA; a BMW/Mini point in Dallas-Fort Worth by AutoNation; a Chevrolet, Lincoln Mercury and Dodge dealerships in Montana by Lithia; and a Mercedes-Honda VW group in New Jersey by Group 1.

The public megas have not rolled on without bumps on their onward and upward courses, however.

Asbury failed to sustain a used-car pilot operation at four Wal-Mart stores in Houston, and could not overcome a Ford veto of a proposed purchase of a Ford store in San Diego that is part of the Bob Baker group. Similarly, Sonic ran into a BMW nix on acquisition of several BMW stores in the Houston Millenium import group.

F&I malpractice probes have tarred AutoNation dealerships in California, Sonic stores in Florida and UAG's Covington Pike Toyota in Memphis, TN. The trio, being regulated publicly owned companies, have been quick to institute reforms and “best practices” codes of conduct, but the “public” megadealer segment has not suffered blows to their growth prospects in the wake of the attention paid to them by the ever-persistent media — such as CBS's “60 Minutes” news magazine April 4 program that slammed dealer reserves on auto financing, focusing on Covington Pike Toyota.

On the contrary, AutoNation Chairman and CEO Mike Jackson was a guest on CNN's nightly Business Report in March and Wall Street financial conferences have heard presentations from Lithia's DeBoer and Group 1 CEO Ben Hollingsworth that betoken respect.

Lithia, Sonic and UAG initiated modest shareholder dividends last year, a sign of security on Wall Street. AutoNation was added to the S & P 500 index only seven years after its founding. Far from running out of gas, it appears the public dealership chains are finally coming into their own.

“Public” Megas Bullish After Strong 2003 Showings

Megadealer Group 2003 Revenues Net Earnings Earnings Per Share 2004 EPS Forecast Stock Price on 4/06 Hi/Low Past Year
AutoNation 287 dealers $19.4 billion $506.1 million $1.32 $1.40-$1.45 $17.60($19.19/$12.80)
UnitedAuto 165 dealers $8.7 billion $85.7 million $2.07 $2.17-$2.27 $28.57($32.05/$11.75)
Sonic Automotive 150 dealers $7.0 billion $87.8 million $2.07 $2.65-$2.80 $25.15($29.00/$14.70)
Asbury Auto 99 dealers $4.7 billion $15.2 million 47 cents $1.76 $17.23($19.70/$7.21)
Lithia Motors 79 dealers $2.5 billion $35.6 million $1.92 $1.95-$2.05 $28.70($30.79/$10.81)
Group 1 Auto 74 dealers $4.5 billion $147.3 million $3.26 $3.20-$3.40 $37.75($40.19/$21.90)
Total group revenues for 2003 reached a record $45.6 billion. Total net earnings were $877 million. Group owned 854 dealerships as of December 31, 2003. Dividend payers: Sonic and UnitedAuto, 10 cents a quarter; Lithia, 7 cents a quarter
TAGS: Dealers
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