(BRK.A), (BRK.B)
Automotive News is reporting that investor George Soros is following Warren Buffett’s lead in acquiring multiple auto dealership groups.
Soros Fund Management is reportedly ready to invest up to $1 billion to get into the slowly consolidating retail auto sales business.
The news of Soros’s interest in acquiring auto dealerships broke at the NADA’s 98th annual convention in San Francisco, which was held January 23-26, 2015.
In October 2014, Berkshire Hathaway announced the purchase of the Van Tuyl Group, a family-owned dealership network which has 78 stores throughout the Sunbelt states. The auto group will be rebranded as Berkshire Hathaway Automotive. The sale was for $4.1 billion, wh0ch is roughly 4 times annual sales.
Auto sales continue to heat up as middle and lower income consumers rebound from the recession. The combination of lower gas prices and pent-up consumer demand are predicted to push new car and light truck sales to roughly 16.94 million for 2015.
Ripe for Consolidation
Like the grocery retailing sector, auto retailing is a slim-profit business, with an average profit margin of 2.2 percent. The slim profit margin makes consolidation attractive for economies of scale. Counterbalancing the tight profit margins are the exclusive territory that dealers gain to represent automotive brands.
There is still plenty of room for consolidation in the retail auto sales sector, which has 17,665 auto dealerships in the U.S., according to NADA. The largest dealership group is currently AutoNation, which has 228 outlets. Recently, AutoNation has been actively buying back its own stock, which is a further indicator that this sector is undervalued.
Penske Automotive Group, which is second in size behind AutoNation, has also been expanding with a doubling of its North American commercial truck dealerships among its top priorities.
(Portions of this article have been updated with new information.)
© 2015 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.