Group 1 Automotive Sees Car Sales Continue To Rise


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Recent data show car sales in the U.S. continue to motor ahead, thanks to better products and an increasingly confident consumer class.

In October, automakers sold 1.1 million new vehicles domestically. That was up 7% from the prior year and marked the highest October sales level in five years. The growth occurred even as Hurricane Sandy cost the industry an estimated 30,000 vehicle sales on the East Coast. The annual selling rate reached 14.3 million vehicles.

Those numbers continued a strong run for the industry this year. Not surprisingly, auto dealers such asGroup 1 Automotive ( GPI ) have seen a similar rise in business.

Group 1 sells and leases 31 brands of new and used vehicles. It has more than 130 dealerships and other franchises in the U.S., making it the nation's fourth-largest auto megadealer.

The company also has five dealership locations, 10 franchises and three collision centers in the U.K. More than half its sales come from Japanese brands.

Industry Trends

Group 1 has seen a rapid uptick in business thanks to a number of favorable industry trends, watchers say.

"A lot of the growth is driven by replacement demand as consumers decide to trade in their aging cars," said Rick Nelson, an analyst at Stephens. "We're also seeing more finance availability. Lenders are getting more aggressive on auto loans, and approvals are up in both the prime and subprime sectors."

In addition, he says, cars being produced today are much more advanced than those that came out as recently as a decade ago.

"The new product is more fuel efficient and features more technology," Nelson said. "Consumers are picking up significantly more miles per gallon by buying new. And used-car trade-in values are really good, too, so that's a driver to the recovery as well."

Group 1's financial rebound actually began in 2010, when it logged a 45% gain in annual earnings and a 22% increase in annual sales after watching both metrics decline the previous two years.

The company continues to post strong top- and bottom-line gains this year. Earnings during the first three quarters of 2012 have risen at least 21%, while sales have climbed at least 18%.

"The U.S. sales cycle has continued to improve steadily," Michael Ward, an analyst at Sterne Agee, noted in a report. "We expect the recovery to continue over the next few years, supported by strong underlying demographics, including a record number of older vehicles on the road and a growing number of licensed drivers."

Meanwhile, Group 1 has boosted its operation by spending $280 million on buyouts the past two years.

In May, it announced the acquisition of Britain's Essex Audi Group in a deal that doubled the size of Group 1's overseas operations. Essex brought aboard six U.K. Audi franchises.

During the third quarter, Group 1 bought a Houston Hyundai dealership that is expected to generate $35 million in annual revenue. On Oct. 1, it acquired an Oklahoma City-based Hyundai dealership estimated to generate $45 million in yearly sales.

"Group 1 has been among the most aggressive of the public dealers in the acquisition arena, adding $1.1 billion in annual revenue over the last two years," Ward noted.

He expects more buyouts in coming months.

"The U.S. market remains highly fragmented with the 10 largest dealers accounting for less than 10% of total industry sales," Ward noted. "The continuation of the industry recovery in the U.S. should result in additional consolidation."

Strength in the U.S. car market has helped Group 1 and other dealers, includingCarMax ( KMX ) andAutoNation ( AN ), enjoy a months-long rally on Wall Street.

Group 1's stock price has risen by a third since late June. Shares hit a record high of 65.99 Oct. 8, retreated for a couple of weeks, rebounded to 64.98 on Nov. 6, and currently trade near 59.

The stock fell back some Oct. 25, when Group 1 reported its third-quarter results.

Q3 Results

Profit for the quarter came in at $1.32 a share, up 31% from the prior year and in line with views. Sales gained 26% to $1.98 billion, slightly above estimates.

Consolidated same-store sales rose 15%, also topping views. Same-store sales for new vehicles rose 20.2%, while same-store sales for used vehicles gained 12.8%.

Despite those lofty numbers, Group 1's shares finished the day down 2.2% amid a decline in margins. Gross margin for the quarter fell 110 basis points to 14.7%.

"The gross margin was pressured from a normalization of inventory and a mix shift to the volume import brands," Nelson said.

Group 1 also saw the average sales price for new vehicles decline 1.2% to $33,050 amid a shift from luxury vehicles and trucks to midline imports.

Watchers expect margins and prices to stabilize in coming quarters. The overall outlook on Group 1 remains strong as well.

Analysts polled by Thomson Reuters expect the company to post full-year earnings of $4.73 a share, up 31% from the prior year. They see profit rising another 13% to $5.35 in 2013.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Investing Ideas
Referenced Stocks: AN , GPI , KMX

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