IRVINE, Calif.--(BUSINESS WIRE)--The 2019 auto dealership buy/sell market stayed steady and on course for yet another 200+ transaction year in 2019, with 103 completed transactions year-to-date. According to the just-released Second Quarter 2019 Blue Sky Report® by Kerrigan Advisors, a decline in new vehicle sales spurred dealers to turn to their higher margin business segments, resulting in an increase in gross profit and earnings.
“The buy/sell market moved at a slower pace during the second quarter,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “Yet even with the second quarter’s decline, 2019 is tracking to be another 200+ transaction year – the sixth consecutive year at this elevated level. Kerrigan Advisors expects transaction activity to remain at today’s elevated pace through the remainder of 2019 and into 2020.”
Kerrigan noted that since 2014, an estimated 1,000 dealers have sold their businesses, representing 12% of the total dealer network. Sellers continue to come to market at a high rate, while the buyer pool grows with new capital seeking investment in auto retail thanks to a diversified and high-margin business model that hedges against an uncertain economy.
Despite recession fears, Kerrigan Advisors expects dealership buy/sell activity to remain strong for the remainder of 2019. “The global trade war has clearly caused uncertainty in the investment community, leading to a flight to higher quality, less risky assets,” said Kerrigan. “Auto retail is emerging as one of those asset classes. High net worth individuals, family offices and Wall Street investors recognize the counter cyclical measures dealers can take to sustain profitability, even when new car sales turn south. Auto retail’s nimble model makes the industry a highly attractive investment in a time of greater economic uncertainty.”
This year’s earnings increase, forecasted in Kerrigan Advisors’ prior Blue Sky Reports, highlights the strength and sustainability of the auto retail business model. The continued shift to higher margin profit centers such as used vehicle sales, F&I, and fixed operations also reflects the reported record earnings in the second quarter by public dealer groups. In their quarterly earnings calls, the groups noted their continued success augmenting new vehicle gross profits with record F&I income per vehicle sold. This is another indication of the industry’s ability to identify growing profit centers despite reduced new vehicle sales and gross margins. Indeed, in the first half of 2019, the industry’s average blue sky value reversed a four-year downward trend, driven by the first increase in average dealership profits since earnings peaked in 2015.
According to the report, in the first half of the year the number of multi-dealership transactions also declined. The rise in single dealership transactions may reflect “franchise pruning” that many organizations are currently undertaking. “Both the public groups and large private dealership groups are capitalizing on their ability to jettison underperforming dealerships and redeploy their capital into higher ROI investments in today’s active buy/sell market,” noted Ryan Kerrigan, Managing Director of Kerrigan Advisors. “Among the franchises being acquired, domestics continue to grow their market share, because buyers are attracted to their lower blue sky multiples and higher expected ROI.”
In addition, the report identified the following three trends, which are expected to meaningfully impact the buy/sell market through the remainder of 2019 and into 2020.
- Improvement in dealership earnings steadies blue sky values
- Publics’ stock price appreciation portends future acquisitions
- Lower interest rates support an active buy/sell market
Highlights from the Second Quarter 2019 Blue Sky Report® by Kerrigan Advisors include:
- The buy/sell market moved at a slower pace in the second quarter, with 49 transactions completed.
- The Kerrigan Index™ is up 37.1% through July 2019. Wall Street investors increasingly believe an auto retail investment is a hedge against a potential recession.
- Average dealership earnings increased 1% over the trailing twelve months ending in June 2019, the first increase in dealership earnings since 2015.
- Despite a decline in new vehicle sales, dealers grew their higher margin business segments, resulting in an increase in gross profit and earnings.
- Since 2014, fixed operations and used vehicle gross profits have increased 10.8% and 27.6%, respectively. By contrast, new vehicle gross profits have declined 7.6%.
- Today, fixed operations and used vehicles represent 75.9% of the average dealer’s gross profit, while new vehicles represent just 24.1% of gross profits.
- Domestics continue to increase their share of the buy/sell market at the expense of import non-luxury and import luxury franchises, which both saw their buy/sell market share decline to 22% and 9% respectively in the first half of 2019, the lowest level in five years.
- Rising real estate prices are increasing the total enterprise value of dealerships and more than offsetting any decline in blue sky value.
- Kerrigan Advisors downgrades Nissan and Infiniti high-end multiples, as the OEM prioritizes volume over dealer profitability and maintains punitive stair step programs that distort vehicle pricing, creating earnings volatility within the dealer network.
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.
The company 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.
Erin Kerrigan is Founder and Managing Director of Kerrigan Advisors, and is a recognized industry expert on dealership valuation, real estate and buy/sells. A sought-after commentator on automotive retailing topics ranging from consumer auto buying trends to auto retail consolidation to private equity in auto retail, she has keynoted numerous automotive conferences and her analysis has appeared in publications such as Automotive News, CNBC.com, The Economist and the Wall Street Journal. For a recent video of Erin’s commentary on the market, click here.
Ryan Kerrigan is Managing Director of Kerrigan Advisors and an expert on US auto retail buy/sells and capital-raising transaction work. Prior, Ryan served as Managing Director at Serent Capital, a $250mm private equity fund investing in middle market companies and served as General Manager of his family’s auto dealership. Mr. Kerrigan began his career as a management consultant at McKinsey & Company, where he advised Fortune 500 companies on growth strategies, organizational issues, pricing and business valuation.
About Kerrigan Advisors
Kerrigan Advisors is the leading 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 on auto retail’s largest transactions, including five of the Top 100 Dealership Groups in the US, more than any other firm in the industry. Led by a team of veteran industry experts, The firm does not take listings, rather develops a customized approach for each client to achieve their goals. In addition to Kerrigan Advisors’ sell-side advisory and capital-raising services, the firm also provides a suite of consulting services including growth strategies, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.
In addition to the monthly Kerrigan Auto Retail Index™, each quarter, Kerrigan Advisors publishes The Blue Sky Report®, which is the auto industry's most comprehensive and authoritative quarterly report and analysis of dealership buy/sell activity and franchise values, received by over 9,000 industry recipients in 35 countries. Kerrigan Advisors’ Founder & Managing Director, Erin Kerrigan, is a recognized expert on dealership valuation, real estate, and buy/sells, and is a frequent speaker at leading auto retail events and conferences, including NADA, JD Power Automotive Roundtable, Automotive News’ Canadian World Congress, AICPA, and NADC. She has also been quoted numerous times by the Wall Street Journal and interviewed by The Economist and has been a keynote speaker for events hosted by American Honda Motor Company, Audi of America, US Trust, Ohio Automobile Dealer Association, and SunTrust Bank. Kerrigan Advisors’ Managing Director Ryan Kerrigan is also a sought-after industry expert. He is featured in a monthly column for Dealer Magazine and has written Op-Eds for Automotive News.