AutoCanada is one of the year’s hottest stocks

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Emonton-based AutoCanada is in the sweet spot of a demographic trend that is changing the face of auto retailing in this country. Many of the owners of the family-run dealerships that sit on the corner of Anytown, Canada, are baby boomers who are increasingly thinking about exit strategies. Add to this the high cost of real estate, increasing demands from automakers that dealers spend millions of dollars upgrading stores and the growing costs of technology as more of the sales process shifts online, and the rush to the exits has become a bit of a stampede.

That's where AutoCanada steps in. Pat Priestner, CEO and chairman of the only publicly traded dealership group in Canada—and one of the best-performing stocks on the Toronto Stock Exchange this year—has been snapping up dealers at a quickening pace. The company has grown from 14 stores just seven years ago to 32 wholly owned dealerships today, operating in six provinces. Priestner figures about 90% of the dealerships that are changing hands in Canada are being purchased by well-capitalized dealer groups (1).

"I see the trend continuing to move in that direction as the cost of buying them"—depending on brand and location, a dealership can fetch from several million to tens of millions of dollars—"becomes even more significant."

There is one problem, however. Just how big can AutoCanada grow? Growth and, more importantly, diversification are limited because several major automakers in Canada restrict public companies from owning dealers. So, unlike other Canadian CEOs who might fear large, deep-pocketed competitors from the United States invading their home turf, the arrival of publicly traded auto dealer giants from south of the border would put a spring in Priestner's step. Why? Automakers place no restrictions on the publicly traded U.S. groups (2). "If one or two of the U.S. groups came up, it would be a huge win for us because" it would likely force the holdout automakers to change their ways in Canada, he says. Ultimately, Priestner believes that improving customer service scores and sales results at the dealerships that AutoCanada purchases is the best way to persuade the manufacturers that don't allow public ownership to change their policies (3).

For now, Priestner is content to grow by adding brands that do allow public ownership. The company bought its first dealership, Crosstown Chrysler in Edmonton, in 1994. Subaru, Nissan and Hyundai stores followed in various locations, mainly in Western Canada. The purchase of an Audi store in Winnipeg this year represented a breakthrough into the luxury brands, and AutoCanada will expand its portfolio by opening its first Kia store early in 2014.

The strategy over the next 18 months is to buy between four and seven outlets. When talking about the rules he uses when considering a purchase, Priestner says he looks for underperforming dealerships that can be turned around dramatically, as well as top performers: "Sometimes you buy a store that's a top 10 performer in just about every metric. What are your odds of improving that one 30%? Not very good. But if you can improve that one 5%, you're still ahead of the game."

When AutoCanada takes over a store, its first steps usually involve putting more emphasis on online marketing and improving communication with potential customers. "You could buy a store where only 20% of the customers are leaving their e-mail addresses with the salesperson. We want to get that to 80%." These are small wins, but they seem to be adding up. AutoCanada's performance—record second-quarter profit, driven by a 26% jump in same-store sales—has turned its stock into a Ferrari on the TSX. The share price has soared 150% this year, to $38.50 as of Nov. 1 from $15.35 at the end of 2012.

Not a bad result for the 58-year-old Priestner, whose first job, at age 17, was cleaning cars as a lot boy at Courtesy Chrysler in Calgary (4). After his first year at the University of Calgary, where he was studying philosophy, he moved to the sales floor during summer break. "I never went back for my second year," he says. "My mom is still mad at me."

FOOTNOTES

1.  Dealer groups sold 64% of new vehicles in Canada last year, up from 57% in 2008.

2.  The U.S. retail market is dominated by, among others, AutoNation, Penske Automotive Group, Group 1, Lithia Motors and Asbury Automotive.

3. Ford, Honda, Mercedes-Benz and Toyota don't permit public ownership of Canadian dealers. GM allows AutoCanada to partner with Priestner to buy dealerships, as long as he holds voting control of the outlets.