DETROIT -- Several car dealership groups boosted their quarterly earnings with stronger results for their parts and service business, a trend that will likely continue as rising interest rate pressure vehicle revenues, analysts said.
About half of the public auto dealerships, including UnitedAuto Group Inc. and Lithia Motors Inc., reported higher to flat quarterly earnings during the first quarter.
Sonic Automotive Inc., Asbury Automotive Group Inc. and Group 1 Automotive Inc., however, were bogged down by charges and rising inventories, which hurt their bottom lines.
Swollen inventories of unsold vehicles and rising interest rates -- which increases selling expenses -- were a major cause for concern last quarter, and analysts said car dealers will have to find ways to offset the costs during the year.
"With our expectations of flat new vehicle sales, rising short-term rates, and elevated inventories, we believe dealers will have to rely on improvements in other departments, especially parts and service, along with acquisition growth, to drive earnings growth in 2005," John Tomlinson, analyst with Prudential Equity Group said in a recent research note.
Profit margins for service and parts business are typically higher than those for vehicle sales.
Group 1, which reported a quarterly loss on Wednesday due a charge for an accounting change, said it will focus on controlling costs through the year.
Sonic, which posted a 23 percent drop in first-quarter profits, could also see a similar drop in its second-quarter earnings per share because of increased costs, the company's CFO E. Lee Wyatt said.
"Expectations for the second half of the year, however, include notable improvements," Wyatt told analysts and reporters on a conference call.
NEW VEHICLE SALES LOWER
New vehicle sales, the core business of dealerships, were down 0.4 percent for the industry during the quarter, with U.S. automakers General Motors and Ford Motor Co. losing market share to foreign rivals.
Both GM and Ford reported a drop of more than 5 percent in U.S. car and truck sales in the first quarter, while Chrysler sales have risen about 7 percent.
AutoNation Inc.'s new vehicle sales dipped due to weak first-quarter sales by the U.S. Big 3, which historically account for about 45 percent of AutoNation's dealership profits.
The largest U.S. automotive retailer posted flat earnings as cost-cutting initiatives and parts unit largely offset weaker new car sales. Earnings were higher excluding a debt repurchase charge.
"Despite weak new and used vehicle comps, management's focus on growing the profitable back end of the business, service and parts, enabled the company to improve gross margins," Merrill Lynch analyst John Casesa said in a research note.
Higher parts and service sales also helped boost Lithia's profit by a higher-than-expected 33 percent, sending its shares up by more than 6 percent.
Medford, Oregon-based Lithia also raised its full-year forecast above Wall Street expectations.
Rival UnitedAuto posted a larger-than-expected 13 percent increase in quarterly profit -- also on strong service and parts business -- and raised its full-year forecast, sending its shares more than 7 percent higher.
A stronger mix of car brands with foreign vehicles accounting for 85 percent of its new car sales also helped UnitedAuto's results.
But rival Asbury posted lower quarterly earnings on restructuring costs even as revenue jumped nearly 14 percent.
The company is currently in the midst of a restructuring drive, which is expected to reduce earnings per share by about 2 cents to 4 cents this year, and increase earnings by about 10 cents per share in 2006.