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Lithia a winner on Wall St.

  • October 20, 2017
  • Jamie LeReau
  • Automotive News

Acquisitions over buybacks pays off

Acquisitions or share repurchases?

In recent years, the six publicly traded new-vehicle dealership groups have grappled with how to balance spending on those two areas. Each has made a slightly different choice.

Those differences began to emerge in late 2014. Before that, starting in 2012 or so, most of the public dealership groups saw their stock prices soar as the auto market rebounded sharply from the Great Recession. But then, stock prices in many cases stalled as Wall Street began to worry about a sales downturn.

So, while continuing to invest in operations, the publics tended to offer investors one of two stories: growth through acquisitions or share buybacks. Growth through acquisitions offers the prospect of growth but can be risky, especially with a red-hot buy-sell market inflating prices for U.S. dealerships beyond what some consider reasonable levels. Share buybacks almost always appeal to Wall Street but siphon cash from operations.

Of the six groups, Lithia Motors Inc. — which prioritized U.S. acquisitions over share buybacks — has drawn the most applause from Wall Street, as evidenced by the fastest-rising stock price and market capitalization of its peers from 2012 to 2016.

That's a fairly short time frame. Over a longer period, Wall Street may reward other strategies — say, Sonic Automotive Inc.'s investment in new, tech-driven sales processes and used-only stores or Group 1 Automotive Inc.'s spending on dealerships in the U.K. and Brazil.

But for now, Lithia is Wall Street's darling. Here's a look at its spending strategy and those of some of its rivals.

 

DeBoer: "My role ... is to create an environment that is proactive and inspires growth."

When Bryan DeBoer became Lithia's CEO in May 2012, he suspected Wall Street was leery of his plan to reverse Lithia's centralized culture by giving dealership managers full autonomy to run their stores as they saw fit. But he needed that cultural change if he was to realize his other ambition: aggressive pursuit of bold acquisitions. He gambled that the combination of strategies would win over Wall Street eventually.

"My role as a CEO is to create an environment that is proactive and inspires growth," DeBoer, 51, told Automotive News. "It's easy to boil it down to M&A, but without the culture that leads those groups to achieve their growth, we wouldn't have achieved" the eventual gains in Lithia's share price and market capitalization.

"Our market cap didn't grow when we were telling our people, 'Everyone has to be the same,' " DeBoer said.

So Lithia switched to a decentralized model.

"From a Wall Street perspective, that scares them. They want a cookie-cutter model," he said.

DeBoer stayed the course. From 2012 to 2016, Lithia spent nearly $2 billion buying dealerships vs. just $199 million on share repurchases. It was a markedly different strat-egy from some of its peers, but it has worked. From 2012 to 2016, Lithia's shares outstanding fell less than those of its peers did while its share price soared, causing its market capitalization to more than double, topping the gains of the other public groups.

"Companies should be trying to grow their market capitalization," said buy-sell adviser Alan Haig, president of Haig Partners in Fort Lauderdale, Fla. "Lithia has done that by putting their money back into buying stores rather than buying back their stock."

Risky business

Behind Lithia's market-cap growth

Because Lithia spent more on acquisitions and less on share repurchases than other publicly traded dealership groups ...

2012-16 Cumulative spending ($ millions)

 

Acquisitions

Share buybacks

Lithia

$1,901.80

$198.60

Penske

$1,241.00

$263.60

Asbury

$318.10

$755.40

Group 1

$1,054.00

$279.80

Sonic

$154.80

$287.60

AutoNation

$1,163.60

$1,866.90

 

 

 

the number of outstanding shares fell less at Lithia than at its peers.

 

2016 weighted AVERAGE share outstanding

2012-16 CUMULATIVE change

Lithia

25.4 million

–1.1%

Penske

86.0 million

–4.8%

Asbury

22.5 million

–28%

Group 1

21.2 million

–2.1%

Sonic

45.6 million

–15%

AutoNation

103.8 million

–17%

 

 

 

Meanwhile, its share price soared ...

 

2016 year-end share price

Change from Jan. 2012

Lithia

$96.04

359%

Penske

$50.79

193%

Asbury

$61.70

184%

Group 1

$77.06

64%

Sonic

$22.73

57%

AutoNation

$48.65

36%

 

 

 

... resulting in its market capitalization more than doubling.

 

Market cap ($ billions)

2012-16 change

Lithia

$2.60

144%

Penske

$4.58

71%

Asbury

$1.48

33%

Group 1

$1.69

22%

Sonic

$1.06

–16%

AutoNation

$5.51

–9.6%

Source: Company reports

When DeBoer took Lithia's helm, the Medford, Ore., dealership group was relatively small compared with its peers, with 86 stores in small- to medium-size markets west of the Mississippi River. Today, after a number of acquisitions that took it out of its midsize-market comfort zone, it has 166 dealerships, including in metro markets in the Northeast and on both coasts. Its 2016 revenue was $8.68 billion, vs. $3.32 billion in 2012.

In late 2014, DeBoer made his first major move, buying DCH Auto Group in New Jersey. That put Lithia on the East and West coasts and in large, competitive markets such as Los Angeles.

It was risky, noted Haig: "DCH wasn't performing very well. So it was a big, bold bet on assets that Lithia thought it could improve."

Wall Street liked it. On June 16, 2014, the day after Lithia announced the DCH deal, Lithia's shares rose 13 percent, or $9.85, to close at $86.53 a share on the New York Stock Exchange — an all-time high then.

"Acquisitions have been a home run for Lithia," said Rick Nelson, managing director in equity research for Stephens Inc. in Chicago. "DCH was a game-changer."

DCH gave Lithia "a lot of confidence" in the success of its model to buy underperforming dealerships and improve them, Nelson said.

"They've done smaller deals, too," Nelson said. "But DCH opened up the metro areas and brought more midline import brands into Lithia's mix. They created a ton of shareholder value."

The buying continues. In September 2016, Lithia bought nine stores from Carbone Auto Group. In May this year, it bought six stores from Pittsburgh's Baierl Auto Group. Three months ago, Lithia bought five stores from Downtown Los Angeles Auto Group. Those three acquisitions are expected to add an estimated $2.1 billion in annual revenue.

In all cases, Lithia kept the seller's leadership on board, giving them operational autonomy.

From January 2012 to the end of last year, Lithia's share price more than quadrupled to $95.81. Its market capitalization more than doubled to $2.6 billion, moving it into third place behind AutoNation Inc. and Penske Automotive Group Inc.

Since 2013, Lithia repeatedly has outpaced other U.S.-based auto retail groups in creating value for its shareholders over the previous one- and three-year periods, claiming the Global Automotive Shareholder Value Award from PwC and Automotive News at the Automotive News World Congress. In 2016, it again won for both periods, with its total shareholder return — including stock-price gains and dividends — rising 24 percent for the one-year period and 191 percent for the three-year period.

Other groups

This year, Penske took the prize among U.S. retailers for creating the most shareholder value over the previous year. Lithia achieved the best performance over a three-year period.

Penske also has been a big winner in market-cap gains and surging share price.

Like Lithia, Penske spent more on acquisitions than share buybacks. The suburban Detroit company's acquisition strategy focused on commercial truck stores in the U.S. and overseas, franchised car dealerships in Europe and the U.S. and used-only groups in the U.S. and U.K.

From 2012 to 2016, Penske's stock price nearly tripled to $50.42. Its market cap soared 71 percent to $4.58 billion.

Group 1, of Houston, also spent more on buy-sells than on share buybacks, yet its gains in share price and market capitalization trailed those of Lithia, Penske and Asbury Automotive Group Inc. Group 1's acquisition strategy centered on dealerships in the U.K. and Brazil. Dealerships in Brazil have struggled in an unstable political and economic climate, though the solid third-quarter 2017 performance may hint at a turnaround there.

Still, Group 1's market capitalization rose 22 percent, and its stock price rose 64 percent to $77.06 by the end of 2016.

"They've grown by stock buybacks and acquisitions," said Nelson. "They've got some tailwinds now in Texas, with Houston being their biggest market and some of the hurricane recovery demand there. Also, things could be bottoming out in Brazil."

AutoNation, of Fort Lauderdale, Fla., spent $1.16 billion on acquisitions from 2012 to 2016 while repurchasing $1.87 billion of its stock. CEO Mike Jackson told Automotive News he repurchases stock when it makes sense, especially when the alternative is buying overpriced dealerships.

"Whenever I see that our stock price is undervalued to what I think it will be, that's an attractive buying opportunity," he said. "In my entire tenure here, I have repurchased 80 percent of the outstanding shares at an average price of $20."

Jackson has been at AutoNation since 1999. The stock recently has been trading above $50.

AutoNation's share price rose 36 percent from 2012 to 2016, but its market capitalization declined 9.6 percent to $5.51 billion.

Sonic, of Charlotte, N.C., also spent more on buybacks than buy-sells. Its stock price rose 57 percent from 2012 to 2016, but its market cap fell 16 percent.

Sonic has been devoting much of its capital to technology in a bid to reinvent the car-shopping experience, in the form of its used-only EchoPark stores and its One Sonic-One Experience program. Success at EchoPark — and moves by Penske and AutoNation also to jump into the used-only space — now is getting Wall Street's attention, but for years, Sonic's stock price languished as investors waited to see if the spending would pay off.

Hannah Lutz contributed to this report.

 

 

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