INCLINE VILLAGE, Nev. - The “once-in-a-lifetime environment” for dealerships changing hands doesn’t appear to be dissipating. At least it didn't in the first quarter.
Kerrigan Advisors highlighted the dealership buy/sell market once again set records to begin 2021, a result of a unique confluence of market factors that resulted in 66 completed transactions, up 20% quarter-over-quarter.
The firm indicated the performance capped 12 months of consolidation activity that resulted in an “unprecedented” 300 completed transactions.
In Q1, Kerrigan Advisors pointed out that most dealerships — regardless of location, franchise and facility — continued to achieve historic profit levels, lifting the valuations of all franchises to new highs.
Kerrigan Advisors’ estimate of the average dealership’s blue-sky value is now $8.5 million, a 10% increase as compared to 2020 and a rise of 33% from 2019.
“The once-in-a-lifetime environment that made 2020 a record year for the automotive buy/sell market was extended, and amplified, by auto retail’s tremendous profitability in Q1, fueling a historic level of acquisition activity,” Kerrigan Advisors founder and managing director Erin Kerrigan said in a news release announcing the availability of the firm’s First Quarter 2021 Blue Sky Report.
“As COVID cases diminished, U.S. consumers emerged from the pandemic with a tremendous amount of capital from savings and government stimulus, as well as great demand for personal mobility,” Kerrigan continued. “This demand, coupled with limited supply, drove dealership profitability to new heights in the first quarter, topping what many thought was an unsurpassable fourth quarter.”
Through March, Kerrigan Advisors determined dealership profits spiked 82% as compared to the six-year pre-pandemic average, resulting in a historic 4.1% net-to-sales margin. The firm pointed out that low inventory resulting from the chip crisis did not appear to dampen consumer demand.
In fact, Kerrigan Advisors highlighted that consumers flush with cash and spurred by low-interest rates, bought vehicles “right off the transport truck.” As a result, consumer spending on new vehicles in the first quarter of 2021 surpassed pre-pandemic levels for the first time.
“We see no sign of consumer demand, high dealership profits and accelerated buy/sell activity abating any time soon, especially as dealers continue to leverage, and pay-forward, the operational efficiencies and digital strategies they adopted during the pandemic,” Kerrigan said.
“While new-vehicle inventory levels will be historically low during the critical summer selling season, rebounding fixed operations, as well as higher-margin used-vehicle sales, will help to offset these short-term challenges.”
Not surprisingly, according to the Blue Sky Report, record earnings by the publics led to record market capitalizations, resulting in higher blue sky multiples as compared to the end of 2020.
The firm calculated that the publics’ spend on acquisitions increased by 220% versus Q1 2020. Lithia continued to lead that charge, closing on the purchase of 10 dealerships during the quarter working closer to the company’s stated goal to add $50 billion in revenue over the next five years.
Kerrigan Advisors went on to mention capital market support contributed to a 53.3% rise in multi-dealership transactions, which represented over one third of all completed transactions in the first quarter of 2021.
The firm added that import non-luxury franchises also saw their share of the buy/sell market rise by seven percentage points to 37%, with Toyota leading all imports at 8.3% of the buy/sell market.
What might be ahead in the M&A space
Also contained in the latest report by Kerrigan Advisors, the firm identified three trends that are expected to impact the buy/sell market for the remainder of the year, including:
— A growing number of dealers will sell in 2021 hoping to lock in current tax rates
— Buyers finance growth with low interest rate debt, rather than expensive private equity
— An alternative dealership valuation model emerges based on revenue instead of earnings
“The disruption associated with digital retailing, accelerated by COVID-19, may be the catalyst for change to auto retail’s historic valuation paradigm,” said Ryan Kerrigan, managing director of Kerrigan Advisors.
Rather than focusing on a multiple of earnings, Lithia, for example, introduced the concept of a percentage of revenue, reporting that most of its transactions are valued between 15% and 25% of revenue, according to the firm.
“This revenue valuation methodology, which is highly accretive based on Lithia’s current blue sky multiple and above market profit margins, is designed to feed Wall Street’s appetite for high revenue growth companies,” Ryan Kerrigan added.
More details by brand
According to the Kerrigan Advisors’ report, buyers have revised the way they apply blue sky multiples, with most applying them to an average of pre-pandemic and post-pandemic performance.
The firm said buyers are “hedging their bets,” giving equal weight to the potential for 2021’s profitability to sustain in the near term, while considering the possibility of an eventual return to pre-pandemic earnings in the future.
The report made two adjustments to blue sky multiples in the non-luxury segment, increasing Hyundai’s and Kia’s high-end multiple and upgrading their multiple outlooks to positive.
“Kia and Hyundai are producing exceptionally designed vehicles, meeting consumers demand for trucks over cars, and not only outperforming the market in unit sales in 2020 and 2021, but also effectively managing the chip crisis, with fewer inventory delays,” Erin Kerrigan said.
As Toyota exceeded Ford’s market share in 2020, with Q1 sales outpacing the industry by 73% and that share expected to grow, Kerrigan Advisors upgraded its multiple outlook to positive from steady.
The firm also noted that Subaru’s multiple outlook was also increased as it continues to make significant sales gains.
“Overall, we anticipate a thriving buy/sell market throughout 2021,” Erin Kerrigan said. “We estimate that over 50% of the industry is in the midst of some form of generational transition, spurred by the economic roller-coaster of the last 12 months.
“Increasingly, 2021 is viewed as a unique opportunity to exit at peak values and potentially lower capital gains tax rates, particularly given the challenge in assessing the impact of industry change on future valuations,” she went on to say.
The quarterly report from Kerrigan Advisors includes analysis of all dealership transaction activity for the year and lays out the high, average and low blue sky multiples for each franchise in the luxury and non-luxury segments.
To sign up to receive the quarterly report, go to this website.