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Blue Sky Values on the Rise

The rise in dealership earnings at the end of the second quarter portends an increase in blue sky values in the second half of 2020.

Though new and used car margins are expected to decline as inventories return to pre-COVID levels, dealership expense reductions are likely to sustain, resulting in a higher margin auto retail business for the foreseeable future. Also, auto sales are projected to rise for the remainder of 2020 and into 2021, as OEMs increase production and incentive spending remains strong. Historically low interest rates will buoy auto sales growth, further supporting an increase in dealership earnings and rising valuations.

Another driver of improved valuations in the second half of 2020 is the reduction in buyers’ cost of capital, also a result of today’s low interest rate environment. Banks, which are sitting on record levels of deposits, are more eager to lend to growing dealership groups given the financial strength of the auto retail industry. Buyers are reporting increasing access to low-cost financing, reducing the equity required for acquisitions.  The resilience of the auto retail business model is also attracting more investors to the industry. These investors believe scale and innovation will exponentially increase future industry profits, rendering a consolidation strategy highly profitable.

As valuations increase and consolidation becomes the name of the game, more single point dealers and family-run dealership groups are deciding the time is right to sell. The volume of sellers coming to market in 2020 is up markedly since 2019. In this environment, Kerrigan Advisors expects the buy/sell market for the remainder of 2020 and into 2021 to be extremely active, perhaps one of the most active on record.  

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