Admit it, most of us can only dream we invest as brilliantly as billionaire Warren Buffett and Wall Street goliath George Soros. This spring, Warren Buffett's Berkshire Hathaway bought Van Tuyl Group and renamed it Berkshire Hathaway Automotive -- becoming the fifth-largest dealership group in the U.S., with over $9 billion in annual revenue. Also just recently, Soros Fund Management made good on its well-known intention to enter the automotive retail sector by investing in McLarty Automotive Group, which had recently acquired eight vehicle dealership stores in Missouri.
It's not rocket science. Monthly new-vehicle sales in the U.S. are testing record highs, and transaction prices keep moving higher. Gas prices remain low, fueling sales of highly profitable SUVs and full-size trucks, and credit remains easily available for consumers to finance these big-ticket items. While we individual investors unfortunately can't simply buy up entire dealership groups like Buffett or Soros did, we can invest in companies that are also poised to benefit amid a lucrative selling period in the U.S. auto industry. Here are two intriguing options to dive into further.
CarMax (NYSE:KMX) took advantage of consumer distrust of dealership salesmen, becoming the first auto retailer to successfully create a no-haggle pricing environment -- and it's resonated with American consumers extremely well. CarMax pays its salespeople the same flat-rate commission no matter what vehicle the consumer buys -- thus, the consumer doesn't need to worry that they're being influenced into buying a car that's not optimal for them just because it inflates margins for the dealership. It's a business model that has excelled over the last decade, with impressive growth rates.
CarMax is different from the other dealership group on this list primarily because it focuses on used vehicles for the bulk of its retail sales. It's absolutely a used-vehicle expert, having retailed over 5 million vehicles and appraised more than 21 million vehicles. That huge amount of sales and appraisal data means that CarMax has more pricing information than just about any entity in the industry. That in turn translates into accurately priced vehicles, enabling CarMax to successfully retail more than 99% of the company's vehicles that are on dealership lots.
Another reason CarMax is intriguing is that its footprint across the nation creates a network effect. CarMax's inventory of 60,000 used vehicles nationwide enables consumers to browse its nationwide inventory on its website, and then have a vehicle transferred to a local store for purchase. That makes each new store that CarMax opens more valuable to consumers all across the nation.
Ultimately, CarMax is a used-vehicle-selling machine, and as the company accelerates the pace of store openings, its future growth story is one that investors hoping to cash in on a surging U.S. auto industry should consider.
2. Sonic Automotive
Sonic Automotive (NYSE:SAH) differs from CarMax in that it drives more than half of its revenue from new-vehicle sales, rather than used vehicles. The company is one of the largest automotive retailers in the U.S. and at the end of 2014 operated 118 franchises that cover 25 brands in 13 states, as well as 19 collision repair centers.
Sonic Automotive is geared toward the luxury market. In 2012, Sonic's luxury brands generated 52% of new-vehicle revenue, and that has grown to more than 56% by the end of 2014 -- with a heavy influence on BMW, Mercedes, Lexus, and Audi. On the flip side, Sonic's import brands (Honda, Toyota, Volkswagen, Hyundai, Nissan) generated 33.5% in 2012 and 31% of revenue at the end of 2014. Domestic brands generate even less, with Ford and General Motors brands generating 14.5% of total new-vehicle revenue in 2012 and only 12.8% last year.
Sonic's focus on luxury vehicles as well as its service repair centers will help the company maintain profitability even during economic downturns. While Sonic's focus is now on luxury vehicles, though, its growth story revolves around expanding its retail business and competing with CarMax in the used-vehicle world. Sonic's One Sonic-One Experience, which has yet to be rolled out to all of its stores, promises consumers no-haggle pricing and completion of a purchase within 45 minutes with one sales rep using an iPad.
Furthermore, Sonic's dive into the used-vehicle business will revolve around its new EchoPark stores. The EchoPark business model calls for a "hub store" in major markets that will handle vehicle reconditioning work and then distribute vehicles to smaller neighborhood stores that typically hold less than 40 vehicles, compared to a hub store that would hold about 300 vehicles. Sonic expects to eventually operate its used-vehicle stores in more than 50 markets with up to 10 stores in each -- but that will take a very long time, and it will face stiff competition in CarMax, which already has a strong head start and nationally recognized brand.
Daniel Miller owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends CarMax. The Motley Fool recommends Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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