Car Dealer Earnings Roundup: Group 1, Sonic Automotive Beat Estimates, Adesa Guides To Low End of Range

Adesa (KAR) reported earnings per share of $0.38, an 8% improvement from the prior year period. Revenues were up 13%. CEO David Gartzke in the release said:

Perhaps most importantly of all, we're pleased to see the retail used vehicle market beginning to show signs of firming, which is a significant factor for increasing vehicles sold at auction.

Specifically, during the conference call, management said used vehicle retail demand in the third quarter saw the steepest declines in a decade. Although they were encouraged to see an improvement in September.

I think they are using the CNW registration data, and as you see from the public dealer results, there seems to be a significant dichotomy between what we are seeing reported out of everyone from CarMax (KMX) to Group 1 (today) and the industry data. My suspicion is that the industry data is a bit overstated (once again the problem with using registration data over an abbreviated time period,) but that there is a significant widening occurring between the “haves and have nots.” Those dealership groups that have the superior systems and processes, and those that do not.

The conversion rate for Adesa was 58.2%, down 60 basis points from the prior year period (of 58.8%), and the worst for the company since 2002. Management’s guidance for EPS from continuing operations was indicated to be at the lower end of its previously issued earnings guidance range of $1.47 to $1.55. Expense increases are simply outpacing revenue growth right now. Although it sounds like the company is moving from the planning stage to the implementation stage in its efforts to standardize processes and centralize certain functions (like the company’s recent hire of a purchasing director).

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Group 1 (GPI) reported 3Q06 earnings per share of $1.10, a 25% improvement from the $0.88 reported in the prior year period, in-line with my estimate, and better than the $1.05 Zack’s consensus of analyst estimates. Management raised full year earnings per share guidance to a range of $3.65 to $3.75 from a previous range of $3.40 to $3.70 My most recently published estimate has been for $3.65 And while this estimate may move slightly, I think today’s results continue to affirm the company is really making strides in putting in better systems and processes at their dealerships. As a result, I remain comfortable with my 2012 eps estimate of $7.96 (the more important number in my opinion.)

One quick note on the used vehicle front. Used vehicle gross profits were up 8.5% (from the prior year period,) with used retail revenues up 4.8% and used retail gross profits up 7.2%. During the conference call management said they were likely benefiting from some industry factors (which appears to be specific to the franchised dealers,) as everyone in the (peer) group seems to be doing well in this category. However, as management stated on the call, given the lower wholesale volumes, they clearly are changing the structure of their used vehicle business as a result of putting the American Auto Exchange software at all of their dealerships in 1Q06.

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Sonic Automotive reported 3Q06 earnings per share (eps) of $0.66, slightly better than the $0.65 reported in the prior year period (and includes $0.01 of stock option expenses that were not included in the prior year results.) The results beat my forecast for $0.61, and Zack’s consensus estimate for $0.62

The most encouraging part of the quarter is that the company continues to show that they are making progress in implementing better systems and processes. Operating income rose to 3.6% from 3.5% in the prior year period as selling, general and administrative (SG&A) expenses as a % of gross profits fell to 74.7% from 75.6% a year ago. The call is going on now and I will have further details tomorrow.