A Look At Seven Auto Retailers Through the Lens of Seven Metrics

As we begin to take some of these costs out, in terms of processing, and appraisal and all of the kinds of things that have to happen in a store that we can do centralized. You know I don't want to talk about it too much because it takes time to get those things in place. And we've still got the duplicate costs of setting them up and getting them trained and putting them in place while we're doing it. So it is a balance right now. We're at a cutting edge change moment. There is a turning point and you don't want to miss it.

- Sid DeBoer, CEO of Lithia Motors

2 principles
Principle #1: The purpose of investing is to allocate society's resources in a manner that generates optimal returns.

I mowed your lawn. In return, you could give me a goat. But what would I do with a goat? So you give me $10 (currency, which in economic terms is referred to as a "store of wealth.") I don't need the $10 at the moment. And instead find a dude who needs the money to buy parts for a new lawn mower motor that can cut the time of mowing a lawn in half.

It works! In five years from now he is making so much money from selling these motors that he is sending me a check for $100 a year (we agreed he would share 10% of any profits). The dude won. I won. And society at large won because now it takes people half the time to mow their lawns. Or maybe instead he didn't have a clue what he was doing, and the parts he bought with my $10 sat worthless, and my hard work (from mowing your lawn) was a waste of time (because I now have nothing to show for it).

The above example is investing at its finest. To spend or devote for future advantage (dictionary.com tells us). And whether it is a professional fund manager picking a stock, a bank deciding on a loan, or even someone in charge of a used vehicle department, everyone with a budget (who makes decisions on where money should be spent in the anticipation of a return) is making an investment. They are the resource allocators you so frequently hear me discuss.

Principle #2: The purpose of this newsletter is to help those making investment decisions understand where needs exist and how those needs are being filled in the auto retail sector so they can make the best allocation decisions.

Hopefully no further explanation is needed to principle #2.

7 metrics
Last week I said that during the "off season" I try to spend a lot of time addressing the "need or want" side of the question. In other words, what is the need or want that these businesses are trying to fulfill? But during the earnings season, I think the attention appropriately shifts to metrics that help us evaluate how effectively the need is being filled, and the return that is being generated from filling that need.

Franchised auto retailers (unlike any of the other companies in the index) have the distinct characteristic of trying to fill almost all of the needs associated with personal transportation (auto retail) under one roof. They sell new and used vehicles, arrange the financing for the vehicle sales (as well as any other warranty and finance type products), and also sell the parts and fix the vehicles when they break down.

Automotive News said AutoNation (AN) ranked #1 with the most amount of new vehicles sold in 2006 (369,567), United Auto Group (UAG) ranked #2 with 183,370 new units sold in the United States, Sonic Automotive (SAH) ranked #3 (140,730), Group 1 (GPI) ranked #4 (129,198), Asbury (ABG) was #6 (104,066), and Lithia (LAD) was #7 (66,224).

And last week, AutoNation, Asbury, Lithia and Group 1 all reported their financial results (metrics) for January, February, and March of 2007 (the first quarter). Sonic reported its tomorrow and United Auto Group will report on May 8, 2007.

I should also point out that while more than 9 out of every 10 vehicle's CarMax sells are used vehicles, and they have a slightly different reporting period (their three month first quarter period ends in May), Automotive News still ranks them #27 in the U.S., with 18,912 new vehicles sold.

So below, I have provided 7 metrics I think are helpful in analyzing these 7 companies (the 6 public franchised dealers and CarMax) ability to fill needs, and some of the returns generated. Since Sonic, UnitedAuto Group and CarMax have not yet reported first quarter financial metrics I have on limited occasions provided my estimates, but in most cases simply provided the historical data.

Metric #1: Operating income including floor plan interest expense per store
Floor plan interest expense is the daily interest you pay while the vehicle is sitting on the lot. And as such essentially is considered a "cost of good sold" in the car business.

Operating income is calculated by taking sales minus any costs you pay for the product or service (labor for folks fixing the vehicles), less any other store or corporate administrative expenses (management, accounting, air conditioning, etc.), and in my figure also subtract out the floor plan interest expense.

I then take this operating income figure (which as I mention subtracts the floor plan), and divide by the total number of stores provided in the company's press release or 10Q filing. With UnitedAuto Group they only provide # of franchises (not locations), and so it is done per franchise. Also since most of the companies report on a "continuing operations" basis, this should only be considered a "best guess" as we don't know how many stores they had on a continuing operations basis in the previous year (although the historical reported figure should be pretty close).

Asbury Auto: generated $390,000 in operating income in the first quarter of 2007, better than the $365,000 I calculate they did in the first quarter of 2006. For all of 2006, Asbury did $1.7 million in operating income per store.

AutoNation: generated $609,000 in operating income in the first quarter of 2007, worse than the $637,000 I calculate they did in the first quarter of 2006. For all of 2006, AutoNation did $2.5 million in operating income per store.

Group 1: generated $420,000 in operating income in the first quarter of 2007, identical to the $420,000 I calculate they did in the first quarter of 2006. For all of 2006, Group 1 did $1.5 million in operating income per store.

Lithia Motors: generated $152,000 in operating income in the first quarter of 2007, worse than the $222,000 I calculate they did in the first quarter of 2006. For all of 2006, Lithia did $771,000 in operating income per store.

Sonic Automotive: will report tomorrow. I estimate they will generate $325,000 in operating income per store versus the $311,000 I calculate they did in the first quarter of 2006. For all of 2006, Sonic did $1.4 million in operating income per store.

United Auto Group: will report May 8, 2007. But I estimate they will generate $172,000 per franchise, down from the $183,000 they generated per franchise in the first quarter of 2006. For all of 2006, UnitedAuto did $769,000 in operating income per franchise.

CarMax (KMX): will report June 20, 2007 their first quarter fiscal 2007 (which ends in May 2007). I don't have an estimate, but I can tell you they did about $863,000 in operating income per store in the first quarter of their fiscal 2007 (ended May 2006). And for all of fiscal 2007 (ended February 2007), they did $2.5 million per store. If I include the company's finance subsidiary [CAF] into the operating results, then I come up with $1.3 million per store in the first fiscal quarter of 2007, and $4.1 million per store for all of fiscal 2007.

Metric #2: Average gross profit per new vehicle
In simple terms gross profit is what I sold the vehicle for minus what I paid for the vehicle. Some of the things I pay for are: 1) the actual cost of the vehicle, 2) shipping it to my store, 3) sometimes title or other documentation expenses, and 4) any cleaning or detailing work that needs to be done on the vehicle. I also receive "floor plan credits" from some manufacturers for holding so many vehicles, and having to pay things like floor plan interest expense, which helps to offset some of the above mentioned costs.

Asbury Auto: generated $2,410 in gross profit per new vehicle in the first quarter of 2007, better than the $2,331, I calculate they did in the first quarter of 2006. In the first quarter of 2005, I estimate they generated $2,225 in gross profit per new vehicle. And for all of 2006, Asbury did $2,311 in gross per new.

AutoNation: generated $2,252 in gross profit per new vehicle for the first quarter of 2007, similar to the $2,252, I calculate they did in the first quarter of 2006. In the first quarter of 2005, I estimate they generated $2,166 in gross profit per new vehicle. And for all of 2006, AutoNation did $2,111 in gross per new.

Group 1: generated $2,064 in gross profit per new vehicle for the first quarter of 2007, worse than the $2,096, I calculate they did in the first quarter of 2006. In the first quarter of 2005, I estimate they generated $2,050 in gross profit per new vehicle. And for all of 2006, Group 1 did $2,105 in gross per new.

Lithia Motors: generated $2,210 in gross profit per new vehicle for the first quarter of 2007, worse than the $2,227, I calculate they did in the first quarter of 2006. In the first quarter of 2005, I estimate they generated $2,278 in gross profit per new vehicle. And for all of 2006, Lithia did $2,129 in gross per new.

Sonic Automotive: will report tomorrow. I calculate Sonic generated $2,406 in gross profit per new vehicle for the first quarter of 2006. Keep in mind the company will restate these historical results to reflect continuing operations, but it should still be pretty close to this figure. In the first quarter of 2005, I estimate they generated $2,285 in gross profit per new vehicle. And for all of 2006, Sonic did $2,460 in gross per new.

United Auto Group: will report May 8, 2007. I calculate UAG generated $2,947 in gross profit per new vehicle for the first quarter of 2006. Once again, UAG will restate these historical results to reflect continuing operations, but it should still be pretty close. In the first quarter of 2005, they generated $2,901 in gross profit per new vehicle. And for all of 2006, UAG did $2,993 in gross per new.

CarMax: will report June 20, 2007 their first quarter (which ends in May). But in the first quarter of fiscal 2007 (ended May 2006), they generated $1,215 in gross profit per new vehicle. In the first quarter of fiscal 2006, they generated $804 in gross profit per new vehicle. And for all of 2006 (fiscal 2007), CarMax made $1,169 gross profit per new.

Metric #3: Average gross profit per used vehicle
Similar to new vehicle gross profit. Although CarMax and Lithia from what I understand only account for labor hours and what they paid for the parts to recondition a vehicle to get it ready for the resale. Whereas I think the other franchised auto retail groups treat reconditioning work (and expenses) as if they went to any repair shop in the neighborhood. Meaning the service department marks up the parts and labor as they would with any other repair job they perform. It is then recorded as profit in the service department and higher costs (than what CarMax or Lithia would come up with) in reconditioning expenses for the used vehicle. Keeping in mind this accounting difference:

Asbury Auto: generated $2,147 in gross profit per used vehicle in the first quarter of 2007, better than the $2,105, I calculate they did in the first quarter of 2006. In the first quarter of 2005, I estimate they generated $1,905 in gross profit per used vehicle. And for all of 2006, Asbury did $2,149 in gross per used.

AutoNation: generated $1,881 in gross profit per used vehicle for the first quarter of 2007, worse than the $1,944, I calculate they did in the first quarter of 2006. In the first quarter of 2005, I estimate they generated $1,871 in gross profit per used vehicle. And for all of 2006, AutoNation did $1,816 in gross per used.

Group 1: generated $2,096 in gross profit per used vehicle for the first quarter of 2007, worse than the $2,155, they did in the first quarter of 2006. In the first quarter of 2005, they generated $1,936 in gross profit per used vehicle. And for all of 2006, Group 1 did $2,113 in gross per used.

Lithia Motors: generated $2,447 in gross profit per new vehicle for the first quarter of 2007, worse than the $2,461, I calculate they did in the first quarter of 2006. In the first quarter of 2005, I estimate they generated $2,349 in gross profit per used vehicle. And for all of 2006, Lithia did $2,426 in gross per used.

Sonic Automotive: will report tomorrow. Sonic generated $2,072 in gross profit per used vehicle for the first quarter of 2006. Keep in mind the company will restate these historical results to reflect continuing operations, but it should still be pretty close. In the first quarter of 2005, they generated $1,925 in gross profit per used vehicle. And for all of 2006, Sonic did $1,925 in gross per used.

United Auto Group: will report May 8, 2007. UAG generated $2,482 in gross profit per used vehicle for the first quarter of 2006. Once again, UAG will restate these historical results to reflect continuing operations, but it should still be pretty close. In the first quarter of 2005, they generated $2,373 in gross profit per used vehicle. And for all of 2006, UAG did $2,427 in gross per used.

CarMax: will report June 20, 2007 their first quarter (which ends in May). But in the first quarter of fiscal 2007 (ended May 2006), they generated $1,924 in gross profit per used vehicle. In the first quarter of fiscal 2006, they generated $1,801 in gross profit per used vehicle. And for all of 2006 (fiscal 2007), CarMax made $1,903 gross profit per used.

Metric #4: Finance and insurance (F&I) profit per vehicle
Dealers will also help you find a bank if you need a loan on a vehicle, or an insurance company if you are looking for something like an extended warranty on the vehicle. And of course they get a "commission" (to simplify things a bit) for helping to arrange these loans and insurance products being offered at the time you buy your vehicle. We call these profits "finance and insurance," or F&I.

One difference with CarMax is that they actually have their own lending group called CarMax Auto Finance [CAF], where they actually approve the loans, and then later on sell off (securitize) the loans to interested investors.

Asbury Auto: received $946 in F&I per vehicle in the first quarter of 2007. In the first quarter of 2006 they generated $893 per vehicle, and in the first quarter of 2005, they generated $935. For all of 2006, they generated $937.

AutoNation: generated $1,109 in F&I per vehicle in the first quarter of 2007. In the first quarter of 2006 they generated $1,038 per vehicle, and in the first quarter of 2005, they generated $971. For all of 2006, they generated $1,066.

Group 1: generated $1,034 in F&I per vehicle in the first quarter of 2007. In the first quarter of 2006 they generated $1,060 per vehicle, and in the first quarter of 2005, they generated $989. For all of 2006, they generated $977.

Lithia Motors: generated $1,137 in F&I per vehicle in the first quarter of 2007. In the first quarter of 2006 they generated $1,063 per vehicle, and in the first quarter of 2005, they generated $1,039. For all of 2006, they generated $1,094.

Sonic Automotive: will report tomorrow. Sonic generated $904 in F&I per vehicle in the firs quarter of 2006 and $883 in first quarter 2005. For all of 2006, Sonic did $922 in F&I per vehicle.

United Auto Group: will report May 8, 2007. UAG generated $909 in F&I per vehicle in the first quarter 2006, and $882 in first quarter 2005. And for all of 2006, UAG did $917 in F&I per vehicle.

CarMax: will report June 20, 2007 their first quarter (which ends in May). But in the first quarter of fiscal 2007 (ended May 2006), I calculate their CAF group and as well as other F&I stuff they arranged (like the franchised dealers) all came out to around $758 per vehicle. And in the first quarter of 2005, I calculate an F&I per vehicle (using this method) of $695. For all of 2006 (fiscal 2007), CarMax I estimate they made $763 F&I per vehicle.

Metric #5: Parts and service same store sales
The revenues each dealership group generated with the same number of stores (hence same store sales) in the first quarter of this year versus the first quarter of previous years. CarMax does not provide it on a same-store sales basis (just total year over year sales). And as I discussed with used vehicle gross profits, I think you have reconditioning work being reported as sales at the dealer groups besides Lithia and CarMax.

Asbury Auto: made 3.4% more dollars from fixing the vehicles and selling parts (to fix the vehicles) on a same store sales basis in the first quarter of 2007. In the first quarter of 2006, service and parts were up 10.3% on a same store sales basis. In the first quarter of 2005, up 9.8%. And for all of 2006, Asbury's parts and service segment was up 6.3% (same store sales).

AutoNation: made 0.7% more dollars from fixing the vehicles and selling parts (to fix the vehicles) on a same store sales basis in the first quarter of 2007. In the first quarter of 2006, service and parts were up 4.5% on a same store sales basis. In the first quarter of 2005, up 4%. And for all of 2006, AutoNation's parts and service segment was up 2.6% (same store sales).

Group 1: made 2.6% more dollars from fixing the vehicles and selling parts (to fix the vehicles) on a same store sales basis in the first quarter of 2007. In the first quarter of 2006, service and parts were up 2.9% on a same store sales basis. In the first quarter 2005, up 3.7%. And for all of 2006, Group 1's parts and service segment was up 1.9% (same store sales).

Lithia Motors: made 4.9% more dollars from fixing the vehicles and selling parts (to fix the vehicles) on a same store sales basis in the first quarter of 2007. In the first quarter of 2006, service and parts were up 5.8% on a same store sales basis. In the first quarter 2005, up 0.3%. And for all of 2006, Lithia's parts and service segment was up 5.3% (same store sales).

Sonic Automotive: will report tomorrow. In the first quarter of 2006, service and parts were up 7.4% on a same store sales basis. In the first quarter 2005, up 0.9%. And for all of 2006, Sonic's parts and service segment was up 5.2% (same store sales).

United Auto Group: will report May 8, 2007. In the first quarter of 2006, service and parts were up 8.2% on a same store sales basis. In the first quarter 2005, up 6.9%. And for all of 2006, UAG's parts and service segment was up 6.9% (same store sales).

CarMax: will report June 20, 2007 their first quarter (which ends in May). They don't report service and parts on a same-store sales basis. But in the first quarter of fiscal 2007 (ended May 2006), service and parts sales were up 2.3%, and for all of 2006 (fiscal 2007), service and parts sales were down 3% (despite having more stores). Management is said that this is because the company's used vehicle business has been so strong they used their technician's time more for reconditioning work (which does not get reported in CarMax's service department revenues) than repair work.

Metric #6: Selling, general and administrative expenses (SG&A) as a percent of gross profits
Basically any operating expense not included in the gross profit calculation (so indirect expenses) gets thrown into the selling, general and administrative (SG&A) expense category. In the dealership world, gross profits tend to be more indicative of your "revenues" because you try to pass through the costs to the customer (and tend to target around $2,000 per vehicle). Therefore what you need to manage your operating expenses (budget) to are the gross profits (sales essentially) you generate.

Asbury Auto: spent $77.70 in SG&A for every $100 in gross profits they generated in the first quarter of 2007. This compares with $78.20 for every $100 in gross profits they generated in the first quarter of 2006, and $81.40 they spent in the first quarter of 2005. For all of 2006, Asbury spent $76.70 for every $100 in gross profits they generated.

AutoNation: spent $71.50 in SG&A for every $100 in gross profits they generated in the first quarter of 2007. This compares with $70.60 for every $100 in gross profits they generated in the first quarter of 2006, and $70.30 they spent in the first quarter of 2005. For all of 2006, AutoNation spent $71.10 for every $100 in gross profits they generated.

Group 1: spent $77.70 in SG&A for every $100 in gross profits they generated in the first quarter of 2007. This compares with $76.20 for every $100 in gross profits they generated in the first quarter of 2006, and $81.20 they spent in the first quarter of 2005. For all of 2006, Group 1 spent $76.70 for every $100 in gross profits they generated.

Lithia Motors: spent $79.30 in SG&A for every $100 in gross profits they generated in the first quarter of 2007. This compares with $76.40 for every $100 in gross profits they generated in the first quarter of 2006, and $76.00 they spent in the first quarter of 2005. For all of 2006, Lithia spent $75.50 for every $100 in gross profits they generated.

Sonic Automotive: will report tomorrow. I estimate they will spend $77 in SG&A for every $100 of gross profits they generate. In the first quarter of 2006, they spent $77.80, and in the first quarter of 2005 they spent $78.70. For all of 2006, Sonic spent $76.30 for every $100 in gross profits they generated.

United Auto Group: will report May 8, 2007. I estimate they spent $80.90 in SG&A for every $100 in gross profits they generated in the first quarter of 2007. In the first quarter of 2006, UAG spent $80.90, and $80.50 in the first quarter of 2005. For all of 2006, UAG spent $79.60 in SG&A for $100 in gross profits they generated.

CarMax: will report June 20, 2007 their first quarter (which ends in May). In the first quarter of fiscal 2007 (ended May 2006), they spent $75.30 in SG&A for every $100 in gross profits they generated. Much better than the $82.80 (per $100 in gross profits) they spent in the first quarter of fiscal 2006 (ended May 2005), and $80 (per $100 gross) they spent for all of 2006 (fiscal 2007 ended February 2007).

If I include CarMax's finance subsidiary [CAF] into the gross profit figure, they spent $66.60 in the first fiscal quarter (ended May 2006), in SG&A for every $100 in gross profits, $72.80 in the first fiscal quarter (ended May 2005), and $70.30 for all of 2006 (fiscal 2007).

Metric #7: Tax rate
I like to look at this figure for two reasons: #1 it often tells me if the bottom line number was favorably or unfavorably impacted by some one time tax adjustments. And it lets me see who is doing a good job of tax planning, which at times I think could be an indicator of how thoughtful the company is with financial disciplines.

Although you have to keep in mind, it can only be an indicator as the markets you operate in (and state tax rates) also influence this figure.

Asbury Auto: spent $36 in taxes for every $100 in pre-tax profits they generated in the first quarter of 2007, better than the $37.50 they spent in the first quarter of 2006. In the first quarter of 2005 they spent $37.50. And for all of 2006 they spent $37.60.

AutoNation: spent $35.80 in taxes for every $100 in pre-tax profits they generated in the first quarter of 2007, better than the $39.70 they spent in the first quarter of 2006. In the first quarter of 2005 they spent $37.80. And for all of 2006 they spent $38.90.

Group 1: spent $34.90 in taxes for every $100 in pre-tax profits they generated in the first quarter of 2007, better than the $38.00 they spent in the first quarter of 2006. In the first quarter of 2005 they spent $36.80. And for all of 2006 they spent $36.60.

Lithia Motors: spent $39.30 in taxes for every $100 in pre-tax profits they generated in the first quarter of 2007, better than the $38.90 they spent in the first quarter of 2006. In the first quarter of 2005 they spent $38.70. And for all of 2006 they spent $38.60.

Sonic Automotive: will report tomorrow. I estimate they will spend $38 in taxes for every $100 in pre-tax profits they generate in the first quarter of 2007. This is identical to the $38 (per $100) they spent in the first quarter of 2006, and pretty similar to the $37.40 (per $100 in pre-tax profits) they spent in the first quarter of 2005. For all of 2006, Sonic spent $40.40 due to some one time items.

United Auto Group: will report May 8, 2007. I estimate they will spend $35.50 in taxes for every $100 in pre-tax profits they generate in the first quarter of 2007. This is a bit lower than the $36.70 (per $100) they spent in the first quarter of 2006, and $37 (per $100 in pre-tax profits) they spent in the first quarter of 2005. For all of 2006, UAG spent $33.80 per every $100 in pre-tax profits, which I think is because of good tax planning and markets (primarily international) with lower tax rates.

CarMax: will report June 20, 2007 their first quarter (which ends in May). In the first quarter of fiscal 2007 (ended May 2006), they spent $38.30 in taxes for every $100 in pre-tax profit they generated. Similar to the $38.40 they spent in the first quarter (ended May 2005), and $38.60 they spent for all of 2006 (fiscal 2007 ended February 2007).

1 Byproduct (the return)
These metrics help get us to the "bottom line," which are the earnings reported by the companies. But earnings over the course of three months don't tell us too much. Instead, they are simply progress points in helping us assess long term future returns. So I look to look at the first quarter results in the context of how close it brings these companies to their annual goals/objectives. . .

Asbury Auto: said they expect to earn between $2.20 to $2.28 in earnings per share in 2007. If I take the midpoint ($2.24) of this range, it means Asbury's $0.45 per share they earned in the first quarter of 2007 is 20.1% of what they hope to earn all year. In the first quarter of 2006 they earned 20.7% of what they earned for all of 2006. And in the first quarter of 2005 they earned 16.9% for what they earned in all of 2005.

AutoNation: does not provide "guidance," something I am totally cool with (I prefer a long term focus). If I take the consensus of analyst estimates polled by Zack's, I see the professionals are generally expecting AutoNation to earn about $1.68. Based on the $0.39 per share they generated in the first quarter of 2007, it means they made 23.4% of what the analysts think the company will make all year. In the first quarter of 2006, they made about 24% of what they generated all year, and in the first quarter of 2005 they made 23.1%.

Group 1: said they expect to earn between $3.75 to $4.08 in earnings per share in 2007. If I take the midpoint ($3.90) of this range, it means Group 1's $0.82 per share they earned in the first quarter of 2007 is 21% of what they hope to earn all year. In the first quarter of 2006 they earned 24.7% of what they earned for all of 2006. And in the first quarter of 2005 they earned 20.7% for what they earned in all of 2005.

Lithia Motors: said they expect to earn between $1.90 to $2.10 in earnings per share in 2007. If I take the midpoint ($2.00) of this range, it means Lithia's $0.34 per share they earned in the first quarter of 2007 is 17% of what they hope to earn all year. In the first quarter of 2006 (adjusting for some hedges) they earned 25% of what they earned for all of 2006. And in the first quarter of 2005 they earned 20.4% for what they earned in all of 2005.

Sonic Automotive: will report tomorrow. I estimate they will earn $0.53, which is 20.9% of the midpoint ($2.53) management has said they expect to earn in 2007 (range of $2.48 to $2.58). In the first quarter of 2006 Sonic earned 22.7% of what they earned for all of 2006. And in the first quarter of 2005 they earned 19.7% for what they earned in all of 2005.

United Auto Group: will report May 8, 2007. I estimate they earn $0.29, which is 20% of the midpoint ($1.45) management has said they expect to earn in 2007 (range of $1.40 to $1.50). In the first quarter of 2006 UAG earned 20.3% of what they earned for all of 2006. And in the first quarter of 2005 they earned 19.5% for what they earned in all of 2005.

CarMax: will report June 20, 2007 their first quarter (which ends in May). The analysts polled by Zack's think CarMax will earn $0.31 per share, which is 28.4% of the midpoint ($1.09) management has said they expect to earn in 2007 (fiscal 2008 range of $1.03 to $1.13). In the first quarter of 2006 KMX earned 38.6% of what they earned for all of 2006 (fiscal 2007). And in the first quarter of 2005 (fiscal 2006 ended February 2006) they earned 69.8% for what they earned in all of 2005 (fiscal 2006).

And the ultimate question, what should I pay for the return?
Based on Friday's closing stock prices, here is what investors are willing to pay for expected returns. . .

Asbury Auto: If I take the midpoint ($2.24) of management's 2007 guidance, I come up with a 7.5% "earnings yield." Also, based on Friday's stock price, Asbury pays (returns to) investors a 2.7% dividend yield, a payout ratio of 35.7% (of what their guidance calls for). The board of directors initially set the payout at 40%, and we'll have to see if they raise it to that level.

Also as you know, Lithia is my top stock pick. Based on my 2012 earnings forecast for Lithia and Friday's closing stock price, I come up with a 27% "earnings yield." If Asbury were to generate $8.05 in earnings per share in 2012, based on Friday's closing price it would give them a 27% earnings yield. Given their earnings plans for 2007 (the $2.24), it means they are 27.8% of the way toward a 2012 earnings yield of 27%.

AutoNation: If I take the consensus for AutoNation to earn $1.68 in 2007, based on Friday's closing stock price, I come up with a 7.9% "earnings yield." But keep in mind, they return value to shareholders by buying back stock (so it shows up in the earnings per share figure) not by returning value to shareholders in the form or a dividend (like most of the other public dealers). So you have a 0% dividend yield.

If AutoNation were to generate $5.73 in earnings per share in 2012, based on Friday's closing price it would give them a 27% earnings yield. Given the consensus expectations for 2007 (the $1.67), it means they are 29.1% of the way toward a 2012 earnings yield of 27%.

Group 1: If I take the midpoint ($3.90) of management's 2007 earnings guidance, based on Friday's closing stock price I come up with a 9.3% "earnings yield." And Group 1 pays a dividend that generates shareholders (based on Friday's close) of 1.3% (annually). This represents 14.4% "payout" ratio of their total earnings.

If Group 1 were to generate $11.34 in earnings per share in 2012, based on Friday's closing price it would give them a 27% earnings yield. Given the midpoint of 2007 guidance ($3.90), it means they are 34.4% of the way toward a 2012 earnings yield of 27%.

Lithia Motors: If I take the midpoint ($2.00) of management's 2007 earnings guidance, based on Friday's closing stock price I come up with a 7.3% "earnings yield." And Lithia pays a dividend that generates shareholders (based on Friday's close) a return of 2% (annually). This represents 28% "payout" ratio of their total earnings.

If Lithia were to generate $7.50 in earnings per share in 2012 (my forecast), based on Friday's closing price it would give them a 27% earnings yield. Given the midpoint of 2007 guidance ($2.00), it means they are 26.7% of the way toward a 2012 earnings yield of 27%.

Sonic Automotive: will report tomorrow. When they last gave guidance, it was to earn somewhere between $2.48 to $2.58 in 2007. If I take the midpoint ($2.53) of management's 2007 earnings guidance, based on Friday's closing stock price I come up with an 8.7% "earnings yield." And Sonic pays a dividend that generates shareholders (based on Friday's close) a return of 1.7% (annually). This represents 19% "payout" ratio of their total earnings.

If Sonic were to generate $7.84 in earnings per share in 2012, based on Friday's closing price it would give them a 27% earnings yield. Given the midpoint of 2007 guidance ($2.53), it means they are 32.3% of the way toward a 2012 earnings yield of 27%.

United Auto Group: will report May 8, 2007. When they last gave guidance, it was to earn somewhere between $1.40 to $1.50 in 2007. If I take the midpoint ($1.45) of management's 2007 earnings guidance, based on Friday's closing stock price I come up with an 7.1% "earnings yield." And UAG pays a dividend that generates shareholders (based on Friday's close) a return of 1.4% (annually). This represents 19% "payout" ratio of their total earnings.

If UAG were to generate $5.55 in earnings per share in 2012, based on Friday's closing price it would give them a 27% earnings yield. Given the midpoint of 2007 guidance ($1.45), it means they are 26% of the way toward a 2012 earnings yield of 27%.

CarMax: will report June 20, 2007 their first quarter fiscal 2008 earnings (which ends in May). When they last gave guidance, it was to earn somewhere between $1.03 to $1.14 in 2007 (fiscal 2008). If I take the midpoint ($1.09) of management's 2007 earnings guidance, based on Friday's closing stock price I come up with an 4.3% "earnings yield." And KMX does not pay a dividend.

If KMX were to generate $6.84 in earnings per share in 2012, based on Friday's closing price it would give them a 27% earnings yield. Given the midpoint of 2007 guidance ($1.09), it means they are 16% of the way toward a 2012 earnings yield of 27%.