ClarityBV Blog

We’re deep in several auto dealership valuations at the moment. So, thought we’d share the following outlook for 2010. This is a summary pulled from the publicly traded dealership groups’ latest annual reports.

• Asbury Automotive Group, Inc. (ABG) “We expect the U.S. automotive retail market will experience a modest recovery in 2010, as we believe that the majority of automotive manufacturers have stabilized production levels in response to the economic slowdown and will focus on using a combination of vehicle pricing and financing incentive programs to increase demand in 2010, although no assurance can be provided in this regard.”
• AutoNation, Inc. (AN) “While we believe that new vehicle sales will gradually improve in 2010 as compared to 2009, we also believe that the automotive retail market will remain challenging and that the annual rate of new vehicle sales will remain depressed by historical standards in 2010. In addition, we expect that the decline in new vehicle sales over the past few years, which has led to a decline in the number of recent-model-year vehicles in operation, our primary service base, may have an adverse impact on our parts and service business for the next several years.”
• Group 1 Automotive Inc. (GPI) “Despite the recent economic downturn and resulting negative impact on our business, we remain optimistic about our business model and expect that, over the long term, industry sales will rebound, reflecting a significant level of pent-up demand.”
• Lithia Motors Inc. (LAD) “Our business is heavily dependent on consumer demand and preferences. The recent downturn in overall levels of consumer spending has materially and adversely affected our revenues. We expect this downturn to continue through at least 2010.”
• Penske Automotive Group, Inc. (PAG) “During 2009, there has been continued weakness in consumer confidence and spending in the markets in which we operate, which we believe has resulted in reduced customer traffic in our dealerships. While we have experienced increased vehicle sales and customer traffic in recent quarters, we expect our business to remain significantly impacted by difficult economic conditions in 2010.”
• Sonic Automotive Inc. (SAH) “Current industry analyst expectations for new vehicle sales volume in 2010 are between 11.0 and 12.0 million vehicles, a 5.8% to 15.4% increase from 2009. Changes in consumer confidence, availability of consumer financing or changes in the financial stability of the automotive manufacturers could cause 2010 industry results to vary.”

For those scoring at home, let’s call it…

• 3 cautiously optimistic (ABG, AN, and GPI)
• 2 pessimistic (LAD and PAG)
• 1 on the fence (SAH)

According to Automotive News, the freeze in dealership acquisitions may be over. The CEO of Lithia Motors noted, “Typically, Lithia acquires dealerships — not including real estate — for 10 percent of the store’s revenue.”

In what might be good news for some depressed domestic dealers, there appears to be an increased interest in under-performing dealerships in small cities. “The dealership group’s management also isn’t afraid to pick up domestic-brand dealerships because of the reliable demand for trucks in many areas in which the company operates.”

Is the worst over or is this a risky “falling knife” strategy?

What is the floor value of a domestic dealership franchise (i.e. blue-sky or goodwill value)?

For Chrysler dealerships, it might be $-0- (zero) or less.

• “Chrysler Group, which rejected 789 dealerships during bankruptcy, hasn’t paid for the franchises of the dealers involved. But the automaker is paying all incentive and warranty rebates due them, said Chrysler spokeswoman Kathy Graham.” (Automotive News)

For Ford dealerships, it might be $1 (one dollar) or less.

• “More than half the dealers in Ford Motor Co.’s dealer development program have purchased their stores under a plan that allowed them to buy out the company’s interest for $1, and all but two of the rest intend to do so, the automaker says.” (Automotive News)

For General Motors dealerships, it might be $450,000.

• “General Motors Co. has allotted an average of about $450,000 for each closed dealership, according to data in the congressional testimony of GM executives.” (Automotive News)

Although NADA is arguing for higher payouts, I would think many disbanded GM dealers are secretly happy to take $450,000 and run. The bigger problem may be what to do with their dealership property in this market…

The National Automobile Dealers Association just released its latest dealership survey data (for 2009, based on 2008 data). The 20-page report and previous year’s reports are available here.

Access to the free NADA DATA 2009 report requires submission of basic contact information. Previous years’ reports are available free and without registration. The survey indicates that the average dealership’s sales declined nearly 14% in 2008. Average pretax profit declined 45% in 2008.

These reports contain a terrific amount of data in a small package. They are essential reading for anyone working in or serving the dealership industry.

Chrysler’s letter to dealers (pdf) that are being “rejected” is a stark example of the potential drop in value from an orderly liquidation to a forced liquidation premise of value. The letter states that Chrysler will be “unable to repurchase” the dealers’ inventories, but will help redistribute them among the remaining Chrysler network.

Automotive News has a list (pdf) of all the rejected dealers. A couple of local dealers were among the rejected, Gurley-Leep Dodge and Heart City Automotive. Gurley-Leep’s website is already featuring “new vehicles for pennies on the dollar.”

Today, more than 1,000 GM dealers expect to receive similar notices.