Pub. 57 2016-2017 Issue 2

34 It is not surprising to see Lithia and AutoNation as the most active on the acquisition trail. Lithia and AutoNation trade at the highest and third highest P/E ratio, respectively, of the publics. With their high P/E ratios, these two companies, as well as Penske, can more easily complete acquisitions that are accretive to earnings. By contrast, Sonic, Group 1 and Asbury have a harder time identifying acquisitions priced at a level that would increase their earnings per share. Chart VII Public Auto Dealership Groups’ Price to Earnings Ratio Based on Last Three Quarters of Earnings Source: SEC Filings for AutoNation, Penske, Group 1, Asbury, Sonic, and Lithia Note: Price to earnings is calculated using the companies’ market capitaliza- tion at the end of the third quarter divided by the companies’ net income over the last four quarters. As Kerrigan Advisors discussed in its last report, two publics, namely Penske and Group 1, continue to seek in- ternational acquisitions as an alternative to US expansion. The pricing of non-US auto retailers provides attractive risk adjusted returns relative to US acquisitions and is accretive to these companies’ earnings. Also, the strength of the US dollar, relative to other currencies, provides the publics with attractive purchasing power. In the third quarter, Penske acquired 12 franchises in the UK and six in Italy, while Group 1 acquired 15 franchises in the UK and two franchises in Brazil earlier in the year. Chart VIII Public Auto Dealership Group US versus International Acquisition Spending Source: SEC Filings for AutoNation, Penske, Group 1, Asbury, Sonic, and Lithia The publics’ international acquisition spending has risen significantly in 2016. International acquisitions provide higher ROIs and the strength of the US dollar increases the publics’ purchasing power abroad. Also of note in the first nine months of 2016 is the public’s capital allocation. As a group, they have doubled their in- vestment in stock buybacks, surpassing the $1 billion mark in the first three quarters of the year. As prices remain high for US auto dealerships, the publics will likely continue to seek alternative investment opportunities for their capital. Penske continues to diversify into the commercial truck market and AutoNation recently committed $500 million to its used car-only retail centers, collision center expansion and branded parts program. Both of these companies cite the high return on investment of these alternative growth strategies, relative to US dealership expansion. 13.9x 12.1x 11.6x 10.1x 8.4x 8.1x Lithia Penske Autonation Asbury Group 1 Sonic Blended Average: 11.3x “It seems to me the pricing internationally still is a lot better, than it is in the US.” Roger Penske, Chairman and CEO, Penske Automotive – 3rd Quarter Earnings Call “As one of the fastest growing companies in both revenue and earnings in the Fortune 500, we will drive our growth trajectory to continue past our $8 and $9 EPS milestones, and reach our aspirational goal to more than double our current revenue base and earnings per share.” Bryan DeBoer, CEO, Lithia Motors, Inc. – 3rd Quarter Earnings Call 99% 86% 1% 14% 9 Months 2015 9 Months 2016 US International