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Auto Dealer Groups Have Cash To Grow: USA Today

February 27, 2002

With plenty of cash and Wall Street's support, auto dealership chains are in the mood to expand, according to a USA Today article by Earle Eldridge.

"We have to put this money to use," said Scott Smith, president and COO of Sonic Automotive. "We have a war chest of about $300 million we can deploy, and there is also our stock."

Sonic is the second-biggest megadealer after AutoNation, and it's among five -- soon to be six -- that are publicly traded. Sonic, AutoNation and the other groups -- UnitedAuto Group, Lithia Motors and Group 1 Automotive -- have seen earnings and stock prices climb

during the past year, pleasing Wall Street as they steadily beat analysts' expectations.

Profits have poured in. Group 1 says its 2001 net income rose 36 percent to $55.4 million from a year earlier; UnitedAuto's increased 49 percent to $44.7 million. Sonic Automotive on Feb. 26 reported a 72 percent jump in fourth-quarter profits as incentives from automakers yielded higher than expected sales. Sonic also raised its 2002 earnings forecast as January and February results exceeded expectations. Sonic said fourth-quarter net income rose to $21.2 million, or 51 cents per share, from $12.3 million, or 29 cents per share, a year earlier.

Stock prices are so good for consolidators that Asbury Automotive Group of Connecticut plans an initial public offering (IPO), probably in mid-March. It will be the first dealer group to go public in about four years.

Wall Street has shown signs of confidence in the megadealers. Morgan Stanley is underwriting Lithia's offer of $100 million worth of new shares, while UnitedAuto is planning to sell $150 million in new shares and get $200 million in credit through a subordinated note offering. Zacks investment firm recently named AutoNation among four stocks with a "buy" recommendation.

"Wall Street has discovered that car dealers are more valuable than previously understood," said Sheldon Sandler, an analyst with Bel Air Partners. "They are more recession resistant, more stable and more profitable" than their suppliers — the auto manufacturers.

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