According to The Blue Sky Report® by Kerrigan Advisors, buy/sell market expected to finish at 2018 levels; average dealership earnings annualizing to 9.3% increase, on pace to reach 2015 peak profit level of $1.5M
Irvine, CA – December 16th, 2019 – The 2019 auto dealership buy/sell market picked up speed during the third quarter and is now poised to register another 200+ transaction year in 2019 – meeting or exceeding 2018 activity levels with over 160 completed transactions at the end of the quarter1. According to the just-released Third Quarter 2019 Blue Sky Report® by Kerrigan Advisors, the growth in the buy/sell market is upported by a healthy US economy, led by consumer spending and spurred by a reduction in the Federal Funds Rate by a quarter percentage point – the third such rate reduction since July. And fueling the strength of the buy/sell market is strong dealership earnings growth, largely driven by used vehicles and fixed operations.
“The industry’s ability to grow earnings despite flat new vehicle sales really shows the resilience of the dealer model,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “That impresses investors and, with more sellers coming to market, buyers are here, seeking acquisitions and investment in auto retail. We see an expanding pool of well-funded buyers that will easily absorb the increase in sellers – and keep the buy/sell equilibrium into 2020.”
That balance is based on positive investor sentiment, driven by growing industry profits. The best indication is the outperformance of The Kerrigan Index™, which is up an incredible 53% through November 2019, surpassing the S&P 500’s performance by 111%. The Kerrigan Index is now just 6% below its June 2015 peak.
The buy/sell market, and the strength of the economy, has also influenced the acquisition strategy of US public dealership groups. “Even though the publics reduced their acquisitions spending in 2019, we believe this was a byproduct of the 2018 decline in their market capitalizations,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors. “Considering their year-to-date valuation rebound, we expect the publics’ US dealership acquisition spending to rise over the next six months, as evidenced by Asbury’s recent announcement of its billion-dollar acquisition of Park Place Dealerships.”
Kerrigan Advisors’ The Blue Sky Report found that since the first quarter of 2019, the publics average blue sky multiple increased 48%, as a result of rising stock prices. At the end of the third quarter, the publics’ blue sky multiples averaged 6.5x. At this level, US dealership acquisitions are more attractive targets.
In addition, the report identified the following three trends, which are expected to meaningfully impact the buy/sell market into the first quarter of 2020.
- Top franchises still receive multiples on pro forma earnings
- Image requirements are a wild card in today’s buy/sells
- Buyers increasingly focus on management in transactions
Highlights from the Third Quarter 2019 Blue Sky Report® by Kerrigan Advisors include:
- Average dealership blue sky values increased 2.9% in 2019 due to improvements in earnings and relative stability in average blue sky multiples.
- Volkswagen’s lower end multiple increased from 2.0 to 2.5. This is a result of several positive indicators for the franchise, including rising buyer demand, 2019 sales growth and the OEM’s renewed focus on dealership profitability.
- Chevrolet and Ford’s high-end multiples were downgraded from 5.0 to 4.5 and their low-end multiples were downgraded from 4.0 to 3.75. Buyers’ willingness to pay higher multiples for these franchises is beginning to diminish in part due to their increasing reliance on truck sales, which are considered more economically cyclical.
- Nissan’s low-end multiple was downgraded this quarter from 3.0 to 2.5. This decline reflects the continued challenges faced by the franchise, both from an OEM management standpoint and a buyer demand perspective.
- The multiple outlook for Audi was also downgraded this quarter. Audi sales are underperforming the luxury market in 2019, down 5.3% year-to-date, versus a luxury sales decline of 1.3%. Kerrigan Advisors expects Audi’s expensive facility requirements, as well as declines in dealer profitability are the primary reasons for the negative sentiment.
- In the third quarter, buy/sell activity picked up with 59 transactions closing, as compared to an average of 51 transactions for the first two quarters of the year.
- The average dealer is tracking to an impressive 9.3% earnings increase and is approaching 2015’s peak profit level of $1.5M, on an annualized basis.
- 86% of dealers expect the valuation of their dealerships to increase or remain the same in the next 12 months according to the 2019 Kerrigan Dealer Survey results released in October.
- Dealers have successfully shifted their focus from new vehicle sales (5.4% average gross margin) to used vehicle sales (11.4% average gross margin), resulting in improved dealership profits, despite declining new vehicle sales. The average dealer is approaching a 1:1 used to new vehicle ratio, having increased the used to new ratio by 9.8% since 2018.
- On average, dealers saw fixed operations revenue grow 5.1% through the third quarter of 2019. As a result, fixed absorption (service and parts gross profit as a percentage of total fixed overhead expense) increased to the highest level since 2010. Today, dealers are less reliant on the new vehicle department to cover the costs of running their business.
- The fastest growing auto retail groups have greater than 11 dealerships, while those groups with fewer than five dealerships are on the decline. As the auto retail industry evolves, scale will be a key differentiator and size could be the biggest driver of success.
The Blue Sky Report®, published by Kerrigan Advisors, is the auto retail industry’s most comprehensive and authoritative quarterly report on dealership M&A activity, as well as franchise values. It includes analysis of all transaction activity for the year, and lays out the high, average and low blue sky multiples for each franchise in luxury and non-luxury segments. For more details and to preview the report, click here.
1Source: The Banks Report & Kerrigan Advisors Analysis