Buffett Gets into the Automotive Game

Have you wondered whether or not car dealerships are a good investment? Warren Buffett happens to think they are, and the market believes that his investment is good enough to boost the sector.

Berkshire Hathaway, owned by Warren Buffett, agreed to buy Van Tuyl Group last Thursday. They have $9 billion in sales and are currently the fifth-largest car dealership in the world. For the billionaire investor, this expands his overall transportation portfolio. His investments already include Burlington Northern Santa Fe railroad and NetJets. Once the acquisition is finished, the company will be renamed Berkshire Hathaway Automotive.

Since this news has reached the public, automotive retailer shares have traded higher. Because that’s how it always goes. When Warren Buffett gets involved with something, everybody else decides to jump on the gravy train as well. Shares of Penske Automotive Group and AutoNation, among other companies, have traded much higher since the announcement.

Here’s the thing…

On Bloomberg View, Edward Niedermeyer, auto industry consultant, is questioning the wisdom of the quick reaction of the market:

“Perhaps the biggest reason to think twice before following the Oracle is that the US auto market is returning to its traditionally sustainable sales peak of between 16 million to 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 the 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.”

On the other side of the coin, Buffett doesn’t intend to end his auto investments here. “I fully expect we’ll buy a lot more auto dealerships over time,” he said to CNBC. Feel free to make as many Planes, Trains and Automobiles jokes as you desire.

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