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Auto Retailer Valuations Drop Signaling Weakness Ahead

The KAR Index™ (The Kerrigan Auto Retail Index) has dropped 9% – from 496.82 to 452.49 – in just the past two weeks, indicating lower public auto retailer valuations.

The group attributes the sharp drop to higher inventory levels, gross margin compression in new vehicle sales, and weakening retailer sales forecasts.

“This is a continuation of a volatile first quarter,” said Erin Kerrigan, Managing Director of Kerrigan Advisors. “After far outperforming the S&P 500 between 2009 and 2015 by over 700%, gravity is starting to set in. With sales growth slowing, auto retail will be a much more competitive industry going forward, likely resulting in lower earnings growth.”

The latest KAR Index™, which is a monthly index for the auto retail industry covering the seven publicly traded auto retail companies with operations focused on the US market, shows:

  • Weakening sales projections and inventory surpluses are having an impact on the publics’ forecasts, contributing to declines in their share prices.
  • Five of the seven publics – Asbury Automotive Group, Group 1 Automotive, Lithia Motors, Auto Nation, and CarMax – reporting drops in net income in the first quarter of 2016
  • Margins for new car sales are under pressure from high inventory levels, more internet sales channels, and increased consumer awareness.

“Although the publics’ share prices are depressed, there is a silver lining: auto retailers have been taking advantage of the dip by repurchasing stock, allowing them to decrease the number of shares outstanding and increase their EPS,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors.

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