What a debacle the auto dealer stocks have been. And it has been a quiet bloodletting.
Back in the first quarter of 2015, the auto dealers were enjoying a solid new-car sales environment, ample used-car margins, strong parts and service growth and wide finance and insurance (F&I) spreads. Earnings estimates and valuations began to rise appreciably for the largest dealers like Penske Automotive (PAG), AutoNation (AN), CarMax (KMX) and even more aggressively for smaller players like Lithia Motors (LAD) and Asbury Automotive Group (ABG).
Then, in the largest confirmation of the quality of this low-margin but high-cash-flow business model, Warren Buffett's Berkshire Hathaway (BRK.B) purchased the largest private auto retailer in the United States, Van Tuyl Group, in March 2015. The multiples expanded further into the year.
The shorts and naysayers were in shock. There was now an M&A premium that was added to ever-increasing expectations of forever wide used-car margins, wide F&I spreads, and parts and service revenue and strong new-car sales. All four pillars of the auto dealer model were hitting on all cylinders. It was a good, albeit brief, period of time.
The obvious cyclical forces in the dealership channel began to show up in the second quarter of 2015. Too much inventory on the new- and used-car lots, F&I trends that would not sustain themselves become a bit more obvious to some; yet the stocks continued higher. And then, after a couple of "in-line quarters," expectations and the corresponding share prices began to crater. The M&A premium and algorithmic forces began to squeeze the group downward -- deservedly so, in my opinion -- from those lofty valuations.
Chirps from Jamie Dimon at JPMorgan Chase (JPM) recently have put more of a spotlight on the $1 trillion auto loan market. The cracks in lending standards, availability and even residual values in this worsening used-car pricing environment are compounding the worries here.
I am not sure expectations accurately reflect these realities; so the only hope for the bulls in the auto dealer group at the moment is the return of Buffett.
I see further downside.
