Why is Warren Buffett selling cars?
Warren Buffett has a car for you. A lot of cars, in fact.
Berkshire Hathaway (BRK.A) is buying the No. 5 auto dealership in the country, Van Tuyl Group. And it's a sector that Buffett will likely continue to raid for acquisitions. "This is just the beginning for Berkshire Hathaway Automotive," Buffett said in a statement announcing the deal.
Still, the deal is raising some eyebrows. Buffett is known for his savvy investments in insurance and financial companies. He bought the Burlington Northern Santa Fe railroad. And he dabbles in sweets, with Dairy Queen and See's Candies in Berkshire's portfolio. But car dealerships?
Actually, the move is classic Buffett for three reasons:
It's a family business. The Van Tuyl Group has more than $8 billion in annual revenue, with 78 dealerships with more than 100 franchises in 10 states.
It's also a well-run business, cultivated over the years by Cecil Van Tuyl and his son, Larry. The company likes to run large dealerships mostly across the southern United States, from California to Florida. It has strong relationships with car manufacturers, which are crucial to success in the sector.
It's ripe for acquisitions. The industry has been in consolidation mode for years, and Buffett is showing signs of aggressively buying up more shops. In fact, he has tasked Larry Van Tuyl, CEO of the Van Tuyl Group, with scouring the country for more potential buys.
"We continue to believe the opportunity to consolidate the auto dealership sector presents one of the best medium-to-long term growth opportunities across retail," Stifel analyst James Albertine said in a research note.
It's lucrative. Car sales have been on fire for a couple of years now, as the economy began to recover and consumers felt confident enough to trade in their clunkers. That's a lot of income from financing and extended warranties. Industry research firm Autodata expects 16.5 million new vehicles to be sold this year, up from 15.6 million in 2013. And even in years when sales flag, dealerships make money from parts and service.
To get a sense of how dealerships have fared lately, check out the earnings reported by AutoNation (AN) and Penske Automotive Group (PAG). AutoNation, the largest auto dealer in the country, sold nearly 85,000 new cars in the third quarter, a 10 percent increase from a year earlier. Penske has seen double-digit gains in profit and revenue this year.
Car sales is just one of several new businesses Buffett, who drives a Cadillac XTS sedan, has been branching into lately. He's been buying up newspapers across the county, including Tulsa World, the Richmond Times-Dispatch and the Jackson County Floridan. Berkshire has also been expanding into the real estate brokerage business, buying companies in California, Pennsylvania, Minnesota and Illinois.