The premise here is to determine whether to proceed for a potential transaction to take a dealer AutoNation private in a leveraged buyout. As a primary input we have the estimates of the unadjusted retail sales monthly data for 10 years spanning from 2000 until 2009 inclusive of “Automobile dealers” which is of utmost importance in the overall evaluation.
We start by looking at the trend of the Automobile sales (in Millions) which has been almost flat only slightly going downward & plunging beginning 2008 - predominantly due to the slump in the global economy (which is attributed as recession). Like most industries seasonal impacts and cyclic nature (annually) are evident also in the automobile sector. Peaks are centered on the summer months of May- August. It’s generally the summer months when people find it the best time to buy cars. The announcement of promotions & increase in salaries are generally announced during beginning of the year for most of the employees / salaried people. This is reflected in the salaries from typically March of every year hence we see that people have a higher disposable income to upgrade to a new car or buy a new one.
Firstly we look to delineate the seasonality by evaluating the seasonal index factors (in fact monthly index) so that we can forecast the true sales void of the effects of each month due to some factors we mentioned previously.
Given this high level view we take a deep dive to forecast what concrete sales could be achieved in this sector in the next 24 months (i.e. year 2010 and 2011) given that AutoNation generates 2% of the total sales. Adopting the industry standards recommended in the statistical field we apply 4 forecasting methodologies. We forecast on the deseasonalized sales, convert the period in absolute increasing numbers and then re-apply the seasonal index to get the seasonal sales values. The 4 methods are:
a) Linear Regression – simple regression of time(numeric) v/s sales