CLEVELAND -

Following its monthly survey of dealers and industry contacts conducted in August, KeyBanc Capital Markets said it remains “bullish” on the outlook for franchised dealers based on wide array of factors closely related to these stores.

Analysts determined that used-vehicle sales should increase at the compound annual growth rate in the mid-single digits during the next few years to a range of 46 million to 48 million units. They said this rise will be driven primarily by increasing supply of used vehicles.

Along with supply on the rise, KeyBanc pointed out other underlying long-term drivers for used sales to be population growth, licensed drivers growth and record average vehicle age.

“The results of our monthly dealer survey as the number of respondents indicating an increase in sales has accelerated in recent months,” analysts said.

“We are increasingly more confident franchised dealers will outperform the used-car market by as much as two-times industry growth near to mid-term,” they continued.

Along with reiterating about the increased availability of late-model used vehicles, KeyBanc projected that used performance at franchised dealers likely will be sparked by certified pre-owned sales and other initiatives specific to franchised stores.

“Late-model used-vehicles sales have lagged the overall used-vehicle market throughout recovery due to constrained availability as a result of a substantial decline in new-vehicle sales throughout 2008 and 2009 timeframe,” analysts said.

“Coming out of the decline new vehicle sales have increased at a compound annual growth rate of 12 percent throughout 2010 to 2012 timeframe, increasing availability of late-model used vehicles with approximately a two-year lag,” they continued.

“Franchised dealers are likely to benefit going forward as late-model used vehicles tend to re-enter the market through trade-in, allowing franchised dealers first hand opportunity to claim the highly desired inventory,” analysts went on to say.

KeyBanc mentioned that CPO sales have accelerated throughout 2013 and have increased 15 percent year-to-date, outperforming the overall used vehicle market, which the firm said is up 4 percent.

“We anticipate CPO volume will grow at the mid-teens compound annual growth rate for the next few years as in addition to low double-digits compound annual growth rate in new-vehicle sales, leased vehicles increased at the mid-teens compound annual growth rate since 2010 and there’s approximately a two- to three-year lag before a vehicle enters the CPO market,” analysts said.

“Manufacturer-certified pre-owned sales are exclusive to franchised dealers and could on average drive used-vehicle same store sales to high-single digits compound annual growth rate for dealership groups under our coverage given their outsized exposure to the segment,” analysts added.

Among the publicly traded groups KeyBanc follows, the firm pointed out how much CPO represents their used-vehicle volume:

—Lithia: 15 percent to 20 percent
—Asbury Automotive: Estimated at 25 percent
—Penske Automotive: 35 percent
—Group 1 Automotive: 30 percent
—AutoNation: 30 percent
—Sonic Automotive: 25 percent to 30 percent

Next on the list of used-vehicle sales drivers were company-specific initiatives such as selling lower priced/higher mileage models.

Analysts said the large public groups are “targeting one used vehicle sold for each new vehicle sold, attempting to retail a trade-in prior to wholesaling, increasing Internet presence, multi-sourcing used-car inventory from sources other than trade-ins and auctions, and other initiatives are driving above market performance for the dealership groups under our coverage and we anticipate this trend to continue.”

F&I and Lending Expectations

Also contained in KeyBanc’s latest survey was an update on what franchised stores expect to generate in the F&I office.

The survey showed earnings growth should continue to outpace revenue for two reasons:

—Total gross profit per unit appears intact as improving trends in used and F&I reported by the majority of KeyBanc’s dealer survey respondents should offset the declining trend in new vehicles.

—Parts and services —which represent approximately 40 percent to 45 percent of a store’s total gross profit — revenues and gross profit margins continue to increase as reported by the majority of dealer survey respondents.

“Total gross profit per unit should remain intact as increasing used and F&I gross per unit trends of more than $50 year over year reported by the majority of our dealer survey respondents (60 percent and 50 percent respectively), should offset the declining trend of more than $50 in new vehicles as reported by 40% of our respondents” analysts said.

“Financing environment remains positive as 50 percent of our respondents continued to indicate banks and finance companies are becoming more aggressive, 50 percent indicated no change, and no respondents indicated a pullback in lending,” they went on to say.

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