Since mid-March, the coronavirus pandemic has caused financial whiplash in auto retail. Before COVID-19 precipitated an economic shutdown, US dealerships were tracking to near record earnings (see Chart I), approaching 2015's peak profits. Dealers conveyed great optimism coming out of the February 2020 NADA convention. That optimism abruptly ended on March 15th as dealership showrooms shuttered and stay-at-home orders proliferated. Auto sales plummeted 15% in March and a further 39% in April.
As steep as the sales decline has been, there are reasons to be optimistic about the industry's resilience in the face of a crisis. The flexibility and sustainability of the dealership business model has proven its ability to overcome the most challenging economic times. It is important to remember that even in the depths of the Great Recession, auto retailers remained profitable despite a 50% decline in new vehicle sales. Most critically, auto sales led the economy out of the Great Recession, outperforming total retail sales by 35% during the five-year period after the crisis and dealership earnings rose at a 31% compounded average growth rate (CAGR) from 2008 to 2012, 12.6 times faster than GDP growth during that period (see Chart II).
While today’s global health crisis is impacting auto retail in different ways from the Great Recession, these differences for the most part are to the benefit of the industry. Out of the gate, vendors, lenders and OEMS have provided dealers with tremendous financial support to ensure they weather the impact of lost sales. In addition, the Federal Reserve and the federal government moved at a record pace to guarantee the credit markets continued to function and businesses and consumers could stay afloat. The record pace with which the US government reacted to the coronavirus crisis contrasts notably with the Great Recession.
During this crisis, dealers have also accelerated their use of technology to increase sales per employee and improve operational efficiencies, while enhancing the customer experience. Perhaps it is for these reasons that Kerrigan Advisors has seen an unexpected surge in buyer interest in acquiring dealerships, at a notably higher level than we saw during the Great Recession. These investors see an opportunity for tremendous earnings growth in auto retail, not only due to a rebound in car sales, but also from reduced friction in the business model.
Given strong buyer demand and today’s low interest rate environment, Kerrigan Advisors does not expect a reduction in blue sky values in the foreseeable future, despite the economic impact of COVID-19 in 2020. In fact, valuations could rise by the end of the year, as earnings outperform downbeat expectations. If past is prologue, today may be the best time to invest in auto retail – that was certainly the case in the last recession.
Kerrigan Advisors is the premier sell-side advisor and thought partner to auto dealers nationwide. The firm advises the industry's leading dealership groups, enhancing value through the lifecycle of growing, operating and, when the time is right, selling their businesses. Kerrigan Advisors has represented some of auto retail's largest transactions and advised more of the largest dealership groups in the US than any other buy/sell firm in the industry. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, the firm does not take listings, rather they develop a customized approach for each client to achieve their personal and financial goals. In addition to Kerrigan Advisors' sell-side advisory and capital raising services, the firm also provides a suite of consulting services including growth strategy, market valuation assessments, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.
Kerrigan Advisors monitors conditions in the buy/sell market and publishes an in-depth analysis each quarter in The Blue Sky Report®, which includes Kerrigan Advisors' signature blue sky charts, multiples, and analysis for each franchise in the luxury and non-luxury segments.—To download a preview of the report, click here.—The firm also releases monthly The Kerrigan Index™ composed of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail.—To access The Kerrigan Index™, click here.—To read the—2023 Kerrigan OEM Survey, click here.—Kerrigan Advisors also is the co-author of NADA's Guide to Buying and Selling a Dealership.
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