Marketplace has a new podcast for kids, "Million Bazillion!" EPISODE OUT NOW

The case for buying up car dealerships

David Gura Oct 2, 2014
HTML EMBED:
COPY

The case for buying up car dealerships

David Gura Oct 2, 2014
HTML EMBED:
COPY

Warren Buffett’s Berkshire Hathaway already owns NetJets and BNSF Railway, and now it’s buying the fifth-largest car dealership in the U.S., the Van Tuyl Group. For those of you keeping score at home, that’s planes, trains and automobiles.

(That’s Buffett’s joke, by the way, delivered Thursday morning on CNBC.)

As a rule, Buffett and Berkshire Hathaway like to invest in things that are easy to understand: candyclothes and bricks, to name just a few.

“Automobile sales is something that I think Warren Buffett feels he can understand, and therefore forecast, and therefore evaluate,” says Meyer Shields, an analyst with Keefe, Bruyette & Woods, which does business with Berkshire Hathaway.

Buffett hasn’t said how much Berkshire paid, but he did say the Van Tuyl Group’s revenue is around $9 billion.

As Dave Sullivan, an analyst with AutoPacific, points out, “$9 billion is a lot of cars.” Since the financial crisis, Sullivan says, car dealers have been consolidating and their business model has changed. As cars have gotten more reliable, drivers are spending less on repairs.

“When you are making your money pretty much all in sales, bigger is better,” he says.

The average age of a car is 12 years old, and Sullivan sees that as an indicator that there is pent-up demand. “It’s a pretty exciting time to be getting into the auto industry for Mr. Buffett,” he says.

It is also exciting for the auto industry that Buffett is getting involved with. “I think it is a positive signal to investors and consumers, for that matter, that this is a very healthy, growing industry,” says David Kass, who teaches finance at the University of Maryland and closely tracks Berkshire Hathaway.

Buffett says he plans to buy more dealerships, most of which are privately owned. Something else makes the timing good for Buffett: A lot of underperforming dealerships have closed since the recession — dealerships that sold Fords, GMs and Chryslers. That means the ones that are left have gotten more profitable.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.