July 14, 2015 – AutoCanada added to our list

AutoCanada Inc. (which owns 48 auto dealerships) is added to the list and rated Buy at $40.36.

I will likely buy some tomorrow.

I found it interesting to see that the gross margin on new cars sold to retail customers averages 10.2%. However the margin on fleet sales is only about 0.9%. Apparently the dealers are ager to get the fleet business in order to get their numbers up and therefore sell them at next to no profit.

I was surprised to see that the margin on used cars sold to retail customers was lower than the new car figure at about 7.7%. This may partly reflect the fact that the a dealer may in a sense over-pay a customer for a trade-in in order to sell the new car.

Not surprisingly the gross profit is much higher an parts /service and especially on finance/insurance products.

It’s a popular notion that a car dealer might give you a better price if you pay “cash”. In reality you generally already are getting a better price since you won’t be paying interest. Also the dealer may strongly prefer that you finance through the dealer┬ásince the dealer then makes a commission on the financing but still gets paid cash immediately by the lender. Even when there is a zero interest offer you won’t likely get a deal by paying cash. The reason for that is that the zero interest would be a marketing promotion from the manufacturer and if you choose not to avail of it that probably does not affect he price the dealer paid for the vehicle.

Another interesting fact about the car business is that apparently the manufacturers set the prices in the first quarter of the year and do not therefore usually adjust them even when the Canadian dollar is changing substantially in value.

I like the idea of owning some shares in dealerships. When I look around any municipality some of the most prosperous looking businesses are car dealerships. Warren Buffett recently bought an auto dealer business and that is another point in favor.

AutoCanada has been beaten way down in price due to a weak Q1 and due to worries about the Alberta economy. At this this point the valuation looks reasonable.

 

 

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