Dealers Seeing Blue Skies

Kerrigan Index, survey find industry buy-sell activity robust despite industry challenges.

Auto dealerships’ ability to not only weather storms but emerge from them in better shape than before has made them all the more coveted by buyers in an accelerating industry consolidation.

The third-quarter Kerrigan Advisors Blue Sky Report^® shows the industry is so far absorbing an estimated $10 billion hit to date from U.S. trade tariffs as automakers nip and tuck to avoid blanket model price hikes and dealers grow service drive and finance-and-insurance sales. In fact, it expects most franchises’ profit growth to increase.

The sell-side adviser anticipates another record-setting year in dealership buy-sell transactions and that the 150 biggest auto groups are on track to reach half of auto retail revenue in the next 15 years. Tracking activity in the trailing 12 months ended Sept. 30, it counts 445 deals and said transactions have nearly doubled since 2019, the last full year before the pandemic.

Dealerships have become hot commodities as profits have grown on the strength of their diversified business model and sales growth despite larger affordability pressures. Taking just the publicly traded auto groups, average sales and earnings are up 5% in the trailing 12 months, their profit alone up an eye-popping 83% from 2019 levels, Kerrigan said.

It pointed out that though the average auto transaction price recently eclipsed $50,000 for the first time, sales were up as consumers rushed to secure expiring electric-vehicle tax credits, and affordability was helped along by somewhat lower borrowing costs and consumer income growth. Cox Automotive, though, recently reported a three-month streak of new-vehicle affordability erosion due to decreased incentives.

In Kerrigan’s recent auto dealer survey, 41% of respondents said trade tariffs have not affected their sales. The poll also found 16% of dealers plan to pick up more stores due to tariff policy, compared to 2% who plan to sell their dealerships, setting the stage for a seller’s market. Still, more are coming to market, especially those with five or fewer stores, said Kerrigan, which pointed out that some don’t want to upgrade their dealerships.

The new post-pandemic profit normal is greasing the buy-sell pipeline as “most buyers and sellers now focus on current financial performance to determine blue sky.” The result is an average 76% blue-sky value increase from before the pandemic. That makes for a reading of 176 on Kerrigan’s Blue Sky Index, up from last year’s low of 170 and 76% above the 2019 baseline of 100.

On a brand level, Toyota and Lexus franchise valuations are at record highs, while Nissan and Infiniti are below 2019, the firm reported.

Many of the smaller dealers see the opportunity to exit the industry “with the wealth they accumulated during the pandemic,” said Kerrigan, which estimates that between 2020 and 2025 the industry took in more than twice the profits it did in the previous six years.

The firm foresees continued robust buy-sell activity with buyers’ ample capital access and eye on increased profitability, helped along by anticipated operational savings from artificial intelligence applications.