Auto dealers rack up record profits

A man shops for used vehicles at the Toyota of Deerfield dealership in Deerfield Beach, Florida.
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The combination of surging new and used vehicle sales, demand for financing and very busy service departments helped auto dealers post their best year ever in 2014.

The National Auto Dealers Association, which represents the 16,300 auto dealers in the U.S., says the average auto dealership boosted its net profit (before taxes) in 2014 by 6.7 percent to $1.09 million dollars. It is the fifth straight year dealers have increased net profits, though the profit margin of 2.2% remained unchanged compared with 2013.

"Auto dealers are clearly doing much better than they were just a few years ago," said Steve Szakaly, Chief Economist for NADA. "But with a profit margin unchanged at 2.2 percent, it shows just how fierce the price competition is right now for new vehicles."

Auto sales and the dollar

New vehicle sales rose to 16.4 million last year, the highest level since 2006. Meanwhile, used vehicle sales climbed above 41 million vehicles, an eight year high.

Service departments, which have long been the most profitable part of auto dealerships, were busier than usual in 2014 due to a record 63.9 million vehicles being recalled.

"The recalls definitely created a lot of challenges for our dealerships," said Earl Hesterburg, CEO of Group One Automotive which has 152 dealerships. "But overall, I would say the surge in recalls has been a positive for us because we've had a chance to get customers into the dealerships."

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Dealers are paid by automakers for recall repair work, but in many cases customers who bring in their vehicles wind up having other service work done, or they look to buy a new or used vehicle.

Last year's wave of recalls was driven by massive campaigns involving GM vehicles with faulty ignition switches and several models with defective airbags.

"It's hard to say how much the recalls helped auto sales last year, but I think it did," said James Albertine, auto analyst for Stifel.

Not surprisingly, with profits climbing, investors have put money into the publicly traded dealer stocks. Shares of Autonation, Group One, and Carmax have all posted strong gains over the last year.

How much longer can the good times last for dealers? Albertine thinks it could continue for a while since auto sales are expected to remain strong as will traffic from customers bringing recalled vehicles in for repairs.

"There's a lag effect with these recalls. Many have been repaired, but there are a lot more that still need to be serviced," said Albertine.

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