UnitedAuto Inc. has pulled the plug on its captive finance company, UnitedAuto Finance, formerly known as Atlantic Auto Finance Corp.
Profits from auto finance were supposed to be a keystone of United's strategy for same-store earnings growth. UnitedAuto and other consolidators are being criticized for growing solely though acquisitions. UnitedAuto Finance was supposed to help counter that criticism.
But UnitedAuto in late December said that it would take a fourth-quarter charge of $13 million to $15 million to close its auto finance operation, based in Fairport, N.Y. It said it would outsource its captive finance operations to a group of regional auto lenders and hand over servicing to Premier Auto Finance Inc., a subsidiary of Aon Corp.
After the announcement, United stock slid to an all-time low of $8.88 per share on Dec. 28. It closed at $9.38 a share on Jan. 15.
'If they're getting out of finance, that is not a good signal,' said Stephen Girsky, auto industry analyst for Morgan Stanley Dean Witter & Co. in New York.
UnitedAuto Chairman Marshall Cogan said in an earlier interview that finance, service and other aftermarket sales have higher profit margins than selling cars and trucks. So the company viewed new-vehicle sales primarily as a stepping stone to that higher-margin business.
In August 1997, Cogan said that in 1998, he wanted to have a captive loan portfolio of $350 million to $550 million - and double that in 1999. But the auto finance company never reached its targets. The captive had a pretax loss of $3.7 million in 1997. At the end of the third quarter of 1998, it had a portfolio of around $300 million.
Half of that was sold to other lenders. The other half is securitized. That means UnitedAuto sold the income from the loans to investors. UnitedAuto continues to collect a servicing fee on that part of the portfolio.
Cogan said in a written statement last month that same-store dealership gross profit increased 6.3 percent in the third quarter of 1998 vs. the year-ago quarter, based in part on profits from parts and service, and extended service contracts.
Cogan said: 'The decision to outsource our automotive finance operations reflects the need to focus our main attention on the sale and servicing of new and pre-owned vehicles, where we have done well in 1998.'