Not the stuff that winning investments are made of. Add to this the fact that the company is highly leveraged with more debt than equity, and you don't have a picture of financial health. Stocking car dealerships sucks up a tremendous amount of working capital, so any liquidity crisis could easily become big problems on the operations side for the company. Although there are a host of company-specific factors in today's debacle, United Auto Group illustrates the risks inherent in many of these new and used car dealerships that have caught the investing public's fancy. To put it bluntly, even at its best the new car dealership business is mediocre.
Margins are low as the company is squeezed by bargaining customers and dominant suppliers.
Inventory turnover is low, given the purchase price of the average car is not exactly pocket change. Credit risk is real, as many of these companies are stealth non-bank financing companies. Overall growth in the industry is single-digit in good years, with the dealerships unable to get the economies of scale the carmakers can attain on small increases in revenues. Although used cars have more favorable economics and some argue that new car dealerships are simply loss leaders to get used car inventory, any business that has to run a loss-leader enterprise is by definition inferior. The Motley Fool.