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Tuesday, April 14, 1998
United Auto Group
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Phone: (212) 223-3300
Price (4/13/98): $16 1/16
HOW DID IT FIND TROUBLE?
In late September United Auto Group gave an "upbeat" presentation at
the Montgomery Securities conference. Following this conference the stock
moved toward its 52-week high. However, the move proved temporary.
The consolidation of auto dealerships looked like the road to riches for
investors as they drove the price of United Auto Group's stock to over $27
last fall. But when United Auto announced results that were $0.15 a share
short of expectations for the third quarter, the stock dropped to $13 and
change.
Over the ensuing months, rumors of mergers, acquisitions, and a bull market
relined investors' wallets as the stock climbed from $13 to $23. Then the
company announced in January that a restructuring charge would result in
a loss of up to $0.60 per share versus expectations of a $0.22 a share profit,
and it was back into the ditch for shareholders. So much for upbeat presentations
to analysts.
Missed earnings and falling profits are a superhighway to Trouble.
BUSINESS DESCRIPTION
United Auto Group is the second largest publicly traded auto retailer. The
company operates dealership franchises in 16 states and Puerto Rico. These
dealerships sell new and used vehicles. The company's dealerships also sell
aftermarket automotive products and service.
The company acquired 32 dealerships last year and recently announced the
divestiture of nine franchises.
FINANCIAL FACTS
Income Statement
12-month sales: $2087 million
12-month income: ($10.1 million)
12-month EPS: ($0.54)
Profit Margin: N/A
Market Cap: $306.9 million
Balance Sheet*
Cash: $172.6 million
Current Assets: $511.1 million
Current Liabilities: $314.4 million
Long-term Debt: $237.3 million
(*As of Sept. 30, 1997)
Ratios
Price-to-earnings: N/A
Price-to-sales: 0.15
HOW COULD YOU HAVE SEEN IT COMING?
When the earnings surprise was announced in October, an investor should
have become wary. One earnings disappointment often leads to another, as
this story illustrates. Analysts downgraded the stock following the
announcement.
The Motley Fool Evening News covered the initial drop in a
feature
article written by Randy Befumo. In that article, Randy pointed out the
inherent weaknesses in the auto dealership business and gave a strong argument
for avoiding these shares. The company was saddled with debt, its financing
arm experienced unanticipated losses, and the automobile business has razor
thin margins. These aren't the attributes of a great investment.
While the idea of reaping savings and improving margins through consolidation
makes sense, the debt financing required to do the deals creates another
layer of costs. The biggest problem for these businesses is the extremely
thin net margins that afflict the industry. There is little room for error.
Avoiding companies with thin margins and hefty debt loads is one way to avoid
trouble.
WHERE TO FROM HERE?
While earnings estimates for United Auto Group would appear to make the stock
look like a bargain, the trouble may not be over for the stock. Standard
and Poor's recently downgraded its outlook for the company to negative and
the company's debt is junk grade. All of the problems pointed out in Randy
Befumo's article are still there.
Margins are low, debt remains high, and the long-term growth rate of the
automobile industry would seem to point away from significant long-term growth
for auto dealerships generally.
While the company is trading at only 12 times 1999 estimates and analysts
project long-term growth of 20% for the company, there is reason to believe
these estimates are highly optimistic. Any economic downturn will stress
debt-laden auto dealerships.
Any investor interested in picking up these shares at "bargain" prices should
kick the tires... two or three times.
-Mark Weaver
([email protected])
Check out the Daily Trouble Message Board!
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