Group 1 Automotive: No Longer a 'Sleeper' Pick

Feb. 7.07 | About: Group 1 (GPI)

I think Group 1 Automotive (NYSE:GPI) is a tremendous example of a company that was a "sleeper." It was an organization with a rich history and a management team that was incredibly adept at buying really good dealerships (and corresponding management teams). It almost was like a "venture capital" organization.

But then the company's CFO retired, and a structural shift in the industry left the company (now a lot bigger in size) unable to continue its existing strategy. It was an asset pool crying out for a new approach. An organization (as I mentioned with my "Urban Meyer" example when I discussed Keystone's earnings) that really needed a management team that could maximize its existing assets. At the time, I argued it would need a management team that could bring in a more sophisticated (operational/integration) approach to the business.

So investors (like myself), were pretty excited when Earl Hesterberg (formerly President of Ford North America) was named the CEO. But we (investors) want decisive action (right away). So it was rather disappointing that Mr. Hesterberg seemed to go in hiding from the investment community when he first came on board. We wanted to hear his plans (like yesterday). While he wanted to assess the asset base he had just walked into (and in the dealership world your "assets" are mostly your people). As frustrating as it was at the time, as I look back, I think he did the wise thing as it would have been unwise to come out right away with a strategy until he had an opportunity to meet and evaluate all of his people (assets).

So, this is exactly what he did in 2005, and by the end of the year he was ready to come out and meet with investors and deliver a strategy (both to shareholders and the employees). He also brought in John Rickel (also from Ford) as Chief Financial Officer. And as a result 2004 (as the previous management team exited) and 2005 (as the new management team "assessed") were "sleeper" periods for Group 1's stock.

And so last year at the National Auto Dealers Association [NADA], I was able to meet with Mr. Rickel for the first time. After this meeting I published a note titled: "the year of the Underdog?" where I talked about how new management team members like Earl Hesterberg and John Rickel at Group 1 (and David Cosper new CFO at Sonic) held the potential to improve performance from the existing assets. And this is exactly what seems to be happening.

Now I don't think I can still call Group 1 a "sleeper" or underdog stock anymore (particularly after the company's 66% rise in stock price in 2006). But I continue to believe management is moving the company in the right direction. After Earl Hesterberg's investor presentation at the Detroit Auto Show (I listened online), I said he may have coined the theme for the group in 2007, which is to "preserve the entrepreneurial spirit at the store level while finding ways to leverage the company's scale."

And when I met with management this week at NADA, I think this is exactly what they are trying to do. I think Mr. Rickel best described what they are trying to do as having a "Group 1" way of doing business. I think I can only describe this idea of a "Group 1 way" as being one with high standards and professionalism.

For example, given all of the changes that have happened at Group 1, I wanted to spend some time trying to understand the organizational structure. Pete DeLongChamps (manufacturer relations) was quickly able to run out and return to the meeting with a full organizational chart. Over the years, I have asked numerous management teams about their organizational structure. You'd be amazed how thrown sometimes this is for a management team, although most of the time, they offer to email me a copy or they simply walk me through the structure. However, I have to say, this was the first time a management team has ever produced one on the spot, really demonstrating how focused they are at putting structure in place at Group 1.

Clearly the changes announced well over a year ago to go to a regional operating structure has simplified and streamlined the operation with 5 only direct reports for Mr. Hesterberg in addition to the regional managers. And when I asked about the company ever having something like a captive finance subsidiary (something that I think eventually re-emerges in the space, but by no means think the public dealers have the systems in place yet), management seemed to think there is still a lot of "low hanging fruit" that they haven't even gotten to something like that.

Analysts love to hear the term "low hanging fruit" and it surprises me that despite the tremendous strides the company made in 2006, they still likely have a lot of areas where they can still improve. Like on the finance side I didn't realize they were still using something like 150 different financial institutions. Clearly, moving more of the lending (in addition to the usual captive finance subsidiary financing) offers the potential for greater vendor rebates with preferred lenders.

Also, as you probably saw last month they brought in Gigi Myung, as vice president of purchasing. Ms. Myung comes over with a tremendous amount of experience in supply chain management having worked for W.W. Grainger, Home Depot, and Dell Computer. And it sounds like she is having a field day with identifying a number of opportunities that can be implemented in the coming months (year).

Of course, my question was, ok, so she identifies something like "light bulbs," (the company buys a lot of light bulbs), how do you convince a General Manager of a store that they are better off in letting the company handle that type of purchase? Management didn't answer this question directly, but instead said, well think about things like advertising. Sure, most of it still happens regionally. But there are a number of national media companies where the company can determine that they are going to spend "x" million dollars in a year. So corporate can go and negotiate in advance with the national media provider. For the local GM, nothing changes, except that they now get a lower rate. And the national media company is happy because they have locked in "x" million dollars.

I think the media (advertising) buy is a good example of how the company is going to try to preserve the entrepreneurial spirit while leveraging scale. For the GM, it doesn't change their ability to reach customers (in the way they choose in a given local market). Yet the overall expense is either lower, or allows the GM to get more advertising per dollar.

GPI 1-yr chart:

gpi 1 yr