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Consolidators Profit on Used Cars, Repairs

March 7, 2001

Wall Street is taking another look at auto dealership groups, bumping up their stock prices even as new car sales have slumped, according to a March 7 story by Earle Eldridge in USA Today.

While automakers and their suppliers have had production cutbacks and layoffs, the stock prices for dealership consolidators have risen the past 3 months, according to Eldridge.

Wall Street analysts and dealership consolidators list several factors that are helping consolidators weather the economic downturn, among them:

* Used car sales. Used cars, which are more profitable for dealers than new cars, sell better during hard times.

* Repair work. Traditionally a major profit center for dealerships, and in a slow economy, some people will opt to get their cars fixed rather than trading them in.

* Size. A slowdown may force some smaller dealers out of business, allowing the better positioned consolidators to increase market share.

The jump in stock prices is a welcome relief for the dealership consolidators, who watched their share prices plummet from as high as $55 a share four years ago to less than $5 a share in 2000.

AutoNation, the biggest consolidator, has begun to turn around after several setbacks.

In a growth-oriented phase, AutoNation snapped up dealerships without determining how best to manage them, according to CEO Mike Jackson. It also built used-car megastores and bought rental-car companies that ended up draining cash because of massive overhead costs.

Now AutoNation has dumped the megastores and spun off the rental-car companies.

Although the company has more than 400 stores in 19 states, consumers may not always be aware that they are shopping at an AutoNation dealership. Because of objections from automakers, the company reversed a plan to make AutoNation a brand name for its dealerships nationwide. Instead, its dealerships now carry locally recognized names, such as the John Elway dealerships in Colorado and Mike Maroone dealerships in Florida.

AutoNation's share price has jumped 18 percent during the past 3 months.

Also on a roll is United Auto Group, which has 130 dealerships in 17 states, Puerto Rico and Brazil.

UAG's share price has jumped 26 percent the past 3 months, and it recently attracted a $14 million stock purchase by Mitsui, a leading Japanese trading company.

Like Jackson, former race-car driver Roger Penske, who heads United Auto Group, says consolidators benefit by selling a variety of brands, which helps them navigate shifting fortunes among automakers.

Penske says consolidators also can save on fixed costs by getting discounts on bulk advertising in their major markets.

But not all consolidators are faring as well as AutoNation and United Auto Group, according to Eldridge. Two have suffered such devastating stock losses that they have been delisted by Nasdaq.

The share price for Fidelity Holdings, a small New York-based dealership consolidator with 12 franchises, has dropped 25 percent in the past 3 months. It has a March 22 hearing to challenge its delisting by Nasdaq.

Hometown Retailers, with 10 dealerships in the Northeast, was also delisted by Nasdaq when, like Fidelity Holdings, its share price fell below $1.

But according to many analysts, what happened to Fidelity and Hometown isn't a harbinger for other consolidators. They predict the strong ones will buy out the weak ones. They dismiss the idea that Internet-based car-buying services could wipe out consolidators.

Automakers have given consolidators a vote of confidence, recently giving some lines of credit to help them purchase small or struggling dealerships.

And, according to many analysts, Wall Street has slowly begun to realize the value of the larger, successful consolidators.

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