A Toyota Highlander at a AutoNation dealership lot. Image source: Michael Sheehan Wikimedia Commons.
U.S. automotive dealership chains AutoNation (NYSE: AN) and Sonic Automotive (NYSE: SAH) offer investors an intriguing way to play the surge in new-vehicle sales. One reason is that dealership chains generate a sizable portion of their bottom-line profits not just from vehicle sales but from parts and servicing operations, which help dealerships stay profitable during downturns.
Furthermore, dealership chains can sell multiple brands, which is less risky than manufacturers that can only bank on their specific portfolio of brands. Ask Volkswagen dealerships how that's working out at the moment. Last week, two large automotive dealership chains posted pretty impressive quarterly results. Here are the highlights for investors:
First up: AutoNation
America's largest automotive retailer recorded a 9% year-over-year gain in revenue to $5.4 billion in the third quarter, generated by solid performance in all of its business segments, which include new and used vehicle sales, parts and service, and finance and insurance. AutoNation also reported a 17% increase in net income from continuing operations, moving from $0.90 per share up to $1.05 per share in the third quarter, compared to last year.
While AutoNation's financial performance was solid, two important things to note about the company's third quarter are its progress on its website and the announcement that it would acquire 12 more dealership stores.
Many investors will remember AutoNation's not-so-subtle breakup with prominent third-party sales site TrueCar. The former has made significant progress on its own website to drive its own online sales. Said Mike Jackson, AutoNation's chairman, CEO, and president, "We are pleased with how the AutoNation brand continues to be embraced and with the progress of our digital initiatives. Our consumer-friendly websites now generate over 25% of unit sales while sales from third-party sources have decreased to under 9%."
AutoNation has also been on an acquisition spree in 2015 and has added 33 stores worth roughly $1.7 billion in incremental annual revenue. It's already its largest acquisition year since 1999, and management says it might not even be done, refusing to rule out adding more stores before the books are closed on 2015 -- though, even if it's true, the deals would likely not close until early next year.
Sonic's solid quarter
While AutoNation heads into the fourth quarter with solid momentum as sales continue to surge and as it adds stores, Sonic Automotive also posted an impressive third quarter, which sent its stock rising nearly 10% after it released results. Sonic Automotive's revenue checked in 6% higher during the third quarter, compared to last year, to $2.49 billion. There was definitely reason for investors to be excited about the quarter, as the company set many financial records.
Sonic's net income from continuing operations increased 12.7% to $27.1 million, which was a record third quarter. The dealership group set an all-time quarterly record for new retail sales of nearly 37,000 units, an all-time quarterly record of pre-owned retail sales of more than 30,000 units, and an all-time quarterly record of $360.3 million in total gross profit.
On top of Sonic's solid earnings during the quarter, it also announced that its board of directors approved a quarterly dividend of $0.0375 per share payable in cash for shareholders of record on Dec. 15, 2015. For the record, that's a sizable 50% increase in the dividend, which demonstrates management's confidence in its business going forward and its commitment to returning value to shareholders.
Looking forward, Sonic historically has a stronger second half of the year due to seasonality, and that's expected to propel the company to the higher end of its full-year earnings-per-share guidance of $1.85-$1.95, excluding costs for EchoPark (its used-vehicle business) and One Sonic-One Experience (its no-haggle-pricing, quick-purchase initiative).
If investors are interested in playing the automotive industry's surge in U.S. sales, these are definitely two of the largest and most well run dealership groups, and are worth looking into further.
