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At publics, buybacks beat acquisitions

Contrary to expectations, public dealership groups are spending more on stock buybacks than on U.S. acquisitions.

During the first quarter, the publics collectively spent $163 million on buybacks, according to the Kerrigan Quarterly Blue Sky Report. That was 70 percent more than the $96 million the Kerrigan report estimated for those groups’ spending on U.S. dealership acquisitions during the quarter.

“The publics are being very disciplined with their capital allocation,” said Erin Kerrigan, managing director of Kerrigan Advisors, a dealership brokerage firm in Irvine, Calif. “If they believe the better investment is their own stock, they are choosing a stock buyback over an acquisition.”

Kerrigan said she continues to be surprised by lower-than-expected acquisition activity by the publics. For example, AutoNation Inc., the country’s largest dealership group, bought $116 million of its own stock during the first quarter, she said, but acquired no dealerships during that period.

AutoNation executives have routinely said buybacks continue to be a good investment and that they want to acquire dealerships but won’t overpay. “I think you’ll see some deals get done in the back half of the year,” AutoNation COO Michael Maroone said this spring.

Kerrigan said the buybacks may reflect a recent decline in price-to-earnings ratios for the publics. Despite stock prices at or near record highs for most of the publics, their PE ratios have gone down as earnings increased. That makes their stock an “increasingly attractive” investment, she said, particularly if they’re not finding dealerships to buy that meet their return-on-investment and other criteria.

Sonic Automotive Inc., which spent $8.4 million on buybacks during the first quarter, is “very supportive” of repurchasing shares, President Scott Smith said during the retailer’s first-quarter earnings conference call: “We recognize that buying our shares is probably the most popular thing out there among our investors.”

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