Auto dealers rack up record profits

The combination of surging new and used vehicle sales, strong demand for financing and busy service departments helped auto dealers post their best year ever in 2014.

The National Automobile Dealers Association, which represents the 16,300 auto dealers in the U.S., said Friday that the average auto dealership boosted its net profit (before taxes) in 2014 by 6.7 percent, to $1.09 million. (Tweet This)

It's the fifth straight year dealers have increased net profits, though the profit margin of 2.2 percent remained unchanged compared to the prior year.

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"Auto dealers are clearly doing much better than they were just a few years ago," said Steven Szakaly, chief economist at NADA. "But with a profit margin unchanged at 2.2 percent, it shows just how fierce the price competition is right now for new vehicles."

New vehicle sales rose to 16.4 million last year, the highest level since 2006, according to NADA. Meanwhile, used vehicle sales climbed above 41 million, an eight-year high.

Service departments, which have long been the most profitable part of auto dealerships, were busier than usual in 2014 due to a record 63.9 million vehicles being recalled.

"The recalls definitely created a lot of challenges for our dealerships," said Earl Hesterberg, CEO of Group 1 (GPI) Automotive which owns 152 dealerships. "But overall, I would say the surge in recalls has been a positive for us because we've had a chance to get customers into the dealerships."

Dealers are paid by automakers for recall repair work. But in many cases, customers who bring in their vehicles wind up having other service work done, or look to buy a new or used vehicle.

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Last year's wave of recalls was driven by massive campaigns involving General Motors (GM) vehicles with faulty ignition switches and several models with defective airbags.

"It's hard to say how much the recalls helped auto sales last year, but I think it did," said James Albertine, auto analyst at Stifel Nicolaus.

Not surprisingly, with profits climbing, investors have put money into the publicly traded dealer stocks. Shares of Autonation (AN), Group 1 and Carmax (KMX) have all posted strong gains over the last year.

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How much longer can the good times last for dealers?

Albertine said they could continue for awhile, since auto sales are expected to remain strong, as will traffic from customers bringing recalled vehicles in for repairs.

"There's a lag effect with these recalls. Many have been repaired, but there are a lot more that still need to be serviced," he said.

Questions? Comments? BehindTheWheel@cnbc.com .