Are car dealerships a good investment? Warren Buffett thinks so, and that's good enough for the market.
Buffett's Berkshire Hathaway on Thursday agreed to buy the Van Tuyl Group, the fifth-largest auto dealership in America with $9 billion in sales. For Buffett, it expanded a transportation portfolio that already included planes (NetJets) and trains (the Burlington Northern Santa Fe Railway). Once the acquisition is completed, the dealership will be renamed Berkshire Hathaway Automotive.
Since news of the sale broke, shares of auto retailers have traded up; when Warren Buffett buys a car dealership, everyone else gets on board. Shares of AutoNation and Penske Automotive Group, among others, spiked after the announcement. But over at BloombergView, auto-industry consultant Edward Niedermeyer is questioning the wisdom of the market's quick reaction:
Perhaps the biggest reason to think twice before following the Oracle is that the U.S. auto market is returning to its traditionally sustainable sales peak of between 16 million and 17 million units per year. While auto sales have been one of the few bright spots in the retail sector during a slow economic recovery, there's no reason to think that will last. Much of that growth is due to the expansion of auto credit, particularly through subprime lending and longer loan terms, so there may not be much juice left in the tank for further growth.