It was not long ago that investors decried the end of auto retail as we knew it. Consumers weren’t buying cars and dealerships were closing left and right. The financial system that supported our industry was in complete disarray.

How short memories can be! It is amazing to think how far we have come since the depths of the financial crisis just 12 long months ago. It actually appears that the credit crisis is subsiding and economic green shoots are sprouting, albeit slower than we would all like.

Public dealership stocks represent the latest green shoots. Investors have been buying them up, driving prices skyward an average of 400 percent since March (see chart one). As AutoNation’s Chairman and CEO Mike Jackson said during the company’s second quarter earnings call, “I think it’s a new world.”

When dealership stock prices quadruple in less than six months, it sure does feel like a new world. So, what does this new world look like? The answer: Not as rosy as the earlier part of this decade, but much better than the last 12 months. Below are some of the characteristics of the new world in auto retail.

New car sales
While few believe we will top 17 million annual new car sales any time soon, the current sales rate appears to be on an upswing with the second half of 2009 tracking well above a 10 million SAAR (thank you Cash for Clunkers). Most predict we will sell at least 11 million new cars next year. Some believe we could hit 15 million new car sales by 2012, which roughly equates to a 15 percent compounded annual growth rate between now and 2012!

At a 15 percent annual growth rate, we are no longer in a shrinking market. In fact, we are in a very strong growth market. With this growth, dealers should finally feel the wind at their backs. For dealers that have “right-sized” their organizations by eliminating unnecessary costs, this revenue growth will equate to even stronger profit growth. The key is to stay lean so as to ensure profits continue to grow while the dealership enjoys the lift from an expanding market.

Consumer credit
The good news is that banks are stabilizing and returning to profitability. Some have repaid TARP, while most have raised their required “stress test” capital. This stabilization will continue to lead to improved consumer lending conditions. While we will not likely return to the sub-prime lending bonanza of the housing boom, most consumers with average or better credit will be able to finance their next car purchase. 

This being said, we will likely not return to inflated loan terms of the hey- day, in which consumers received 120 percent loan-to-value financing on 80-plus month car loans. As difficult as this will be for consumers with negative car equity, it will ultimately make for a healthier auto retail industry. The fact of the matter is that these aggressive loan terms simply brought forward future car sales. Constrained loan terms, though difficult to stomach today, will eventually stabilize the industry to a more sustainable sales rate for the long term.

Dealer credit
Though consumers will begin to see improved access to credit, unfortunately dealers will continue to feel constrained. New floorplan, real estate loans, working capital lines and acquisition financing will be hard to come by for some time. Banks, captives and specialty finance companies will have minimal interest in corporate and commercial real estate risk, especially in auto retail.

As such, dealers should plan for the worst and hope for the best. You should expect tougher terms, higher rates, more personal and corporate guarantees, and stricter covenants from your lenders. This is the new world in dealer credit. For those of you who are interested in acquisitions, this may be the first time you consider taking on an equity party to finance your expansion. 

Mergers and acquisitions
Even with the difficult dealer credit markets, it is not all doom and gloom for the dealer community. The good news, as noted at the beginning of this article, is that Wall Street is valuing our sector at attractive multiples. As you can see in chart two, the average public dealership group is trading at a forward P/E ratio (stock price/expected annual earnings per share) of 16.9.

At these strong multiples, public dealership groups can afford to pay much higher multiples for private dealership acquisitions. Why is this? Because if the publics pay you a multiple of earnings that is less than their multiple, the transaction is accretive to their earnings (earnings per share increases after the transaction). With public dealership stocks trading at 52-week highs, we may finally see some M&A activity again in our sector. In fact, Mike Jackson said at the right price, AutoNation would be interested in a Chevy or Ford store.

Perhaps buy sells will actually return sooner than we had expected.  It appears Wall Street is regaining faith in our sector. Maybe this is what Mike Jackson meant when he said it is a “new world.” Regardless, this new world feels a lot better than last year. I hope Mike is right!

Erin Kerrigan is senior vice president of AutoStar, a leading provider of long-term capital for auto dealers. AutoStar counts among its clients North America’s largest public consolidators and privately-owned franchise dealers.