When Warren Buffett's Berkshire Hathaway bought Van Tuyl Group last October, it took control of the fifth-largest chain of auto dealerships in the United States. It was a move that reinforced Buffett's well publicised confidence in the spending power of US consumers. In his latest letter to shareholders, he insisted: “Though we invest abroad as well, the mother lode of opportunity resides in America." Recent news that another billionaire investor, George Soros, could be eyeing up deals in the US motor trade suggests that Buffett isn't the only one to see things that way.
A look at the numbers reveals why...
- Automakers sold 16.5 million new vehicles in the US during 2014, up nearly 6% on the previous year (as this impressive Bloomberg graphic shows).
- J.D. Power are currently forecasting that total sales of light vehicles in the US will hit 17 million in 2015.
- To put that in context, just 12.6 million new cars were registered across the EU last year, with 2.3 million of them sold in the UK.
What makes dealerships a great investment?
With around 17,000 auto dealerships trading across the country, the US stock market offers numerous options to trade on America's affection for buying new cars. But what should you look for? In an interview with Fortune about the purchase of Van Tuyl, Buffett reiterated his mantra of buying well run firms that earn a high rate of return on their tangible assets, preferably at an attractive price.
He said that car dealerships could be very good businesses, with few receivables, a foreplan of inventory and the potential to lease their real estate. As a consequence, there needn't be a great deal of capital actually invested in these business. He also pointed out that Van Tuyl's 78 dealerships each averaged over $100 million per year in revenue. So even on fairly narrow margins, it's still possible to earn a high return if you don't tie up too much capital in a $100 million business.
We've picked out some of America's biggest auto retailers and included some 'quality' factor comparables. They include Stockopedia's QualityRank, which incorporates several metrics that are designed to pick up long term improving trends in the sorts of efficiency and profitability factors that investors like Buffett regard so highly.
Name | Mkt Cap £m | Quality Rank |
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Ben HobsonStockopedia writer, editor, researcher and interviewer! 0 commentsThere are currently no comments on this post
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