What typically happens within the confines of a dealership — retailing and servicing vehicles — isn’t solely influencing the values and transactions of stores nowadays. Rather, two firms that monitor dealership buy/sell activities mentioned other factors such as foreign-trade clashes as an element that could impact if activity picks up significant steam to close the year.
Haig Partners and Kerrigan Advisors each recently shared their second-quarter reports, discussing an array of economic factors that might play a role in what a single-point, family-owned store might fetch, as well as how dealer groups might expand their footprints.
“Auto dealers have managed to defy gravity and increase their profits compared to last year,” Haig Partners president Alan Haig said in a news release. “The buy-sell market has suffered this year due to uncertainties in buyers’ minds about tariffs and the overall direction of the economy.
“But the ongoing strength of the auto-retail industry is bringing buyers back to the table, and we believe that transaction activity will rebound to more normal levels in the second half of the year,” Haig continued. “Given the large number of dealerships available for purchase, we think the rest of 2019 and 2020 will present excellent opportunities for groups looking to add scale.”
Despite recession fears, Kerrigan Advisors also 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 Erin Kerrigan, founder and managing director of Kerrigan Advisors. “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,” Kerrigan continued in a news release. “Auto retail’s nimble model makes the industry a highly attractive investment in a time of greater economic uncertainty.”
More details from Haig
As published in the Q2 2019 edition of The Haig Report, the number of dealerships bought and sold in the U.S. decreased by 60% in Q2, compared to an exceptionally busy Q2 2018. The number of dealerships that traded hands fell from 122 to 49.
Haig pointed out acquisition spending in the first two quarters of 2019 by publicly traded auto retailers is less than half of that spent in the same period of 2018. The firm explained this pause in public company investments may be attributed to waiting to see the outcome of trade wars, tariffs and Federal Reserve actions unfolding.
Thanks to a lift in dealership profits so far this year, Haig noted the estimated average blue-sky value per dealership held steady from 2018. At current multiples, dealerships offer a healthy return to buyers and strong prices to sellers.
“There are a large number of dealerships on the market for sale today due to aging owners, increasing complexity of operations, and a perception that smaller dealers will have greater difficulties competing with larger groups in the future,” the firm said.
Other key findings from the Q2 2019 Haig Report include:
• Macroeconomic indicators such as GDP, employment and household incomes, transaction size, low fuel prices and consumer sentiment remain highly favorable for dealers.
• Private dealers are increasing their focus on used vehicles, with volume up 4.1% compared to last year and several clients achieving greater than 2:1 used to new ratio.
• On a combined basis profits have trended upward as the gains in Parts & Service and Finance & Insurance have more than offset the declines in the new car business.
• Floorplan expense has driven almost all of the increase in cost, with a $275 swing in net floorplan cost over the last 3 ½ years. However, the Federal Reserve’s recent 25 basis point rate cut should lead to a $25 lower floorplan expense per vehicle retailed for the average dealer.
• The NADA average private dealership profits for the 12-month period ended Q2 2019 was $1.37M, up 0.6%, reversing three years of declines.
• Most investors now believe autonomous vehicles are unlikely to impact dealers for decades and electric vehicles will remain a niche market.
To download The Haig Report, go to this website.
Additional insights from Kerrigan
Kerrigan Advisors reported this year’s dealership buy/sell market stayed steady and on course for yet another year of more than 200 transactions 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,” Erin Kerrigan said. “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. The firm said 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.
This year’s earnings increase, forecasted in Kerrigan Advisors’ prior Blue Sky Reports, highlighted the strength and sustainability of the auto retail business model. Kerrigan mentioned 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.
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,” said 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. They included:
— Improvement in dealership earnings steadies blue sky values
— Publics’ stock price appreciation portends future acquisitions
— Lower interest rates support an active buy/sell market
Other highlights from Kerrigan Advisors’ latest report included:
— 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. 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 also downgraded 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.
For more details and to preview Kerrigan Advisors report, go to this website.