Analysts have a bleak outlook for car dealers after CDK cyberattack

It has been a rough time to sell and service cars.

Since June 20, automotive dealers and service shops across the United States and Canada using CDK Global's dealership management system software (DMS) have been sent back to the technological stone age, as the software firm's primary product was taken offline following a series of extensive cyberattacks.

Though the company and its competitors that serve the U.S. and Canadian dealership pool have been reactive in helping calm the storm, analysts predict that the bumps in the road might have some major damage to the bottom lines of some of the largest auto retailers in the country.

A customer looks at vehicles for sale at an AutoNation Toyota dealership in Hayward, California, US, on Monday, June 24, 2024. Bloomberg/Getty Images

According to a note recently published by J.P. Morgan, analysts predict that some of the largest publicly traded auto dealer groups will see a 7% to 10% hit on earnings per share come the results of Q2 2024 earnings.

The six dealer groups cited by J.P. Morgan include the Asbury Automotive Group  (ABG) , AutoNation Inc.  (AN) , Group 1 Automotive Inc.  (GPI) , Lithia Motors Inc.  (LAD) , Sonic Automotive Inc.  (SAH)  and Penske Automotive Group.  (PAG)  Ashbury, AutoNation, Group 1, Lithia and Sonic use CDK as their primary dealership management system provider, while Penske uses CDK's software for its Premier Truck Group dealerships.

Analysts state that the hardest hits from the outage won't come from the showroom and sales floors where prices of new used cars are negotiated, rather the busier, more anxiety-ridden part of the dealership that owners dread visiting: the service and parts department. The experts at J.P. Morgan claim that the loss of CDK's software has made affected service departments much less efficient at fulfilling orders and repairs for customer cars.

"We believe dealer [service and parts] will bear the brunt of the DMS outage, given significant efficiency loss, while new and used car sales and F&I are likely to see a slightly lower impact in the near term," J.P. Morgan analysts said in its June 28 note.

Light at the end of the tunnel

Vehicles for sale at an AutoNation Honda dealership in Fremont, California, US, on Monday, June 24, 2024. Bloomberg/Getty Images

The attack on CDK Global has been confirmed as a ransomware attack, which is defined by the FBI as a type of "malware, that prevents you from accessing your computer files, systems, or networks and demands you pay a ransom for their return."

The shutdown of the company's DMS software has caused hiccups in nearly half of dealerships across North America, which resulted in dealers resorting to pen and paper and temporary fixes with other software providers.

Though the Q2 earnings reports for the affected dealership groups are expected within the next few weeks, J.P. Morgan analysts note that "a substantial portion" of the losses caused by the CDK outage should be recouped within a few weeks once CDK's systems come online.

More Automotive:

According to a June 28 report by Automotive News, CDK Global has restored service to Group 1 Automotive and an additional small set of dealership customers on June 27 as part of a reboot that is expected to roll out in phases. The same day, the company said that it is working to bring other applications in its DMS suite back online.

However, the impact of the outage is substantial when presented with the numbers. According to estimates from Michigan-based Anderson Economic Group, the impact could collectively cost dealers $1 billion, should the outage continue into the July 4th holiday — a major auto sales holiday for dealers.

In a statement to AutoNews, Anderson Economic Group CEO Patrick Anderson noted that the impact of CDK Global should warn companies within and outside of the automotive industry about the dangers of lax cybersecurity practices.

"This is a hammer blow for 15,000 dealers and it should be a wake-up call to the rest of the economy that they're also vulnerable to these kinds of organized, state-supported hacking attacks and ransomware."

"These dealers are having to take extraordinary efforts to keep their operations open and some share of the business they expected to do is going to be lost to them forever."