Market Performance

Oil has been the big winner over the past 4/8 weeks. Large stocks have seen a modest increase but small stocks are mostly flat over the past month+

Market Stats

Consumer confidence has started to tick higher the past 4 months after a long flat stretch… Interesting to note that confidence levels are still below even Feb 2020.

Purchasing indices (PMI) show continued strength… Even compared to the past 10-year+ period.

A common theme from purchasing surveys was the shortage around labor and finding people.

Quick Value

Auto Dealers — Asbury Automotive ($ABG) and Lithia Motors ($LAD)

Thanks to @HotlantaCapital on Twitter, I decided to dig deeper into the auto dealers this week… Asbury Automotive ($ABG) was mentioned as a high-performer with a solid 5-year outlook for growth… So I decided to take a quick peak at Asbury and Lithia Motors ($LAD).

These companies sell new cars, used cars, help customers finance them, and offer parts and service to maintain them. On top of that, they are both building out e-commerce offerings to expand reach.

Lithia outlines the auto market as a ~$2 trillion market opportunity…

…and both Asbury and Lithia are looking for massive revenue and earnings performance over the next 5 years driven by tuck-in acquisitions and e-commerce penetration.

What does e-commerce mean to an auto dealer??

Lithia (Driveway) and Asbury (Clicklane) view it as:

• Ability to buy online

• Trade-in services

• Planning / scheduling maintenance services

• Most importantly, it should drive better conversion

Each of the publicly traded players in this market are banking on both success in digital offerings AND a successful acquisition program — something to watch for with increasing competition a likely outcome (Carvana comes to mind).

And it seems the goal should ultimately come back to parts, service, financing, and insurance… These pieces make up some 70%+ of gross profit despite being less than 17% of sales. Maybe that approach is too simple / obvious?

Auto dealer stocks have performed extremely well over the past 5 years with the majority of that outperformance coming off of COVID lows in 2020.

Despite this, Lithia trades at ~14x forward earnings, Asbury at 10x earnings, and (less optimized peer) Sonic Automotive ($SAH) at 9x earnings. All reasonable earnings multiples.

This looks like an interesting group worth closer investigation. Consider this a running list of notes on the space. Some open questions that remain:

• Can all participants pursue the same strategy simultaneously?

• If pushing online sales of new/used autos to geographically distant customers, how can they capture any high margin parts and service revenue?

• Speaking of distant customers — this is a product line that would seem to have significant shipping costs, does the customer pay for this or are margins impacted?

• More online sales means greater price discovery from market to market — how does that impact margins long-term? (i.e. the stereotypical negotiation / user car salesman motto getting lost in the equation)

• How will autonomous / electric vehicles impact these 5 year plans? Would seem the market for new and used cars could change dramatically…

• These outlooks are reliant on share-taking it seems… Unlikely that any of these offerings increase the “size of the pie” for automobiles…