FORT LAUDERDALE, Fla., and IRVINE, Calif -

Before stores intensified their holiday-season sales efforts, both Haig Partners and Kerrigan Advisors released their third-quarter dealership buy/sell activity reports, highlighting how activity during the timeframe put the transaction pace on a healthy course to round out 2019 and to begin 2020.

Beginning first with the Q3 2019 edition of The Haig Report released by Haig Partners, the firm said the number of public and private dealerships that sold in the U.S. decreased 31% in Q3 2019 compared to Q3 2018, dropping from 106 to 68.

Excluding a unique transaction in Q3 2018 that included 28 stores of the Ken Garff Automotive Group, Haig indicated the number of dealerships sold in Q3 2019 represented a 12.8% decline. The firm added the number of dealerships sold during the first three quarters of 2019 decreased 36% from the same period in 2018. 

Haig calculated that acquisition spending in the first three quarters of 2019 by publicly traded auto retailers decreased by 28% compared to the same period in 2018, but spending in Q3 2019 jumped 80% year-over-year.

Haig’s report indicated profits at privately owned dealerships over the last 12 months through September came in 2.9% higher than for the full year 2018. Threats from technology disruptors such as autonomous vehicles, electric vehicles and ride sharing appear to be dissipating, according to Haig’s analysis.

Haig also noted blue-sky multiples remained essentially unchanged from the second quarter. Haig lowered the estimated blue sky multiple on the top and bottom end of the range for Infiniti from 3.0 times-3.75 times to 2.75 times-3.25 times, and increased the top-end of the blue sky multiple range for Subaru by 0.5 times to 5.0 times-6.5 times.

When higher profits per dealership are combined with the same 4.80 times average blue sky multiple as the previous quarter, Haig estimated the value of privately owned dealerships increased 2.9% from year end 2018 to Q3 2019.

Haig Partners president Alan Haig said in a news release, “Based on reports from the market and our own practice, we are expecting a good number of transactions to close in the first quarter of 2020. There are more dealerships available for sale than in the past, and there are many buyers with access to plenty of capital.”

Other key findings from the Q3 2019 Haig Report that’s available here also included:

— Macroeconomic indicators such as GDP, employment, inflation, fuel prices and consumer sentiment remain highly favorable for dealers.

— Other trends, such as lower interest rates, lower average monthly car payments and increasing dealership profits, are helping dealers.

— Fleet sales are up 0.2% in Q1-Q3 2019, but retail sales were down 2.3%.

— Floorplan interest expense has swung from a credit of $119 per vehicle in 2015 to an expense of $121 so far in 2019.

— The average dealership pre-tax profit for the 12-month period that ended Q3 2019 was $1.40 million, up 2.9% from year end 2018.

— Average estimated blue-sky value per dealership increased 2.9% in Q3 2019 to $6.7 million compared to $6.5 million at year-end 2018.

— The average stock price for the six publicly traded franchised auto retailers is up 79% in 2019.

— Most investors now believe that, for the foreseeable future, threats from autonomous cars, ride sharing, and electrification will not have a measurable impact on dealership values.

Views from Kerrigan Advisors

The team at Kerrigan Advisors said the dealership buy/sell market is now poised to register another 200-plus transaction year in 2019.

According to the firm’s Third Quarter 2019 Blue Sky Report, Kerrigan Advisors indicated the growth in the buy/sell market is supported by a healthy U.S. economy, led by consumer spending and spurred by a reduction in the Federal Funds Rate by a quarter percentage point — the third such rate reduction since July. 

And Kerrigan Advisors added that also fueling the strength of the buy/sell market is strong dealership earnings growth, largely driven by used vehicles and fixed operations.

“The industry’s ability to grow earnings despite flat new vehicle sales really shows the resilience of the dealer model,” said Erin Kerrigan, founder and managing director of Kerrigan Advisors. “That impresses investors and, with more sellers coming to market, buyers are here, seeking acquisitions and investment in auto retail.

“We see an expanding pool of well-funded buyers that will easily absorb the increase in sellers — and keep the buy/sell equilibrium into 2020,” Kerrigan continued in a news release.

In addition, the Kerrigan report that’s available here also identified the following three trends, which are expected to impact the buy/sell market into the first quarter of 2020, including:

• Top franchises still receive multiples on pro forma earnings

• Image requirements are a wild card in today’s buy/sells

• Buyers increasingly focus on management in transactions

Ryan Kerrigan, managing director of Kerrigan Advisors pointed out that the buy/sell market and the strength of the economy has also influenced the acquisition strategy of U.S. public dealership groups.

“Even though the publics reduced their acquisitions spending in 2019, we believe this was a byproduct of the 2018 decline in their market capitalizations,” he said.

“Considering their year-to-date valuation rebound, we expect the publics’ U.S. dealership acquisition spending to rise over the next six months, as evidenced by Asbury’s recent announcement of its billion-dollar acquisition of Park Place Dealerships,” he went on to say.

Other highlights from the Third Quarter 2019 Blue Sky Report by Kerrigan Advisors included:

• Average dealership blue sky values increased 2.9% in 2019 due to improvements in earnings and relative stability in average blue-sky multiples.

• Volkswagen’s lower end multiple increased from 2.0 to 2.5. This is a result of several positive indicators for the franchise, including rising buyer demand, 2019 sales growth and the OEM’s renewed focus on dealership profitability.

• Chevrolet and Ford’s high-end multiples were downgraded from 5.0 to 4.5 and their low-end multiples were downgraded from 4.0 to 3.75.  Buyers’ willingness to pay higher multiples for these franchises is beginning to diminish in part due to their increasing reliance on truck sales, which are considered more economically cyclical.

• Nissan’s low-end multiple was downgraded this quarter from 3.0 to 2.5. This decline reflects the continued challenges faced by the franchise, both from an OEM management standpoint and a buyer demand perspective.

• The multiple outlook for Audi was also downgraded this quarter. Audi sales are underperforming the luxury market in 2019, down 5.3% year-to-date, versus a luxury sales decline of 1.3%. Kerrigan Advisors expects Audi’s expensive facility requirements, as well as declines in dealer profitability are the primary reasons for the negative sentiment.

• In the third quarter, buy/sell activity picked up with 59 transactions closing, as compared to an average of 51 transactions for the first two quarters of the year.

• The average dealer is tracking to an impressive 9.3% earnings increase and is approaching 2015’s peak profit level of $1.5 million on an annualized basis.

• 86% of dealers expect the valuation of their dealerships to increase or remain the same in the next 12 months according to the 2019 Kerrigan Dealer Survey results released in October.  

• Dealers have successfully shifted their focus from new vehicle sales (5.4% average gross margin) to used vehicle sales (11.4% average gross margin), resulting in improved dealership profits, despite declining new vehicle sales. The average dealer is approaching a 1:1 used to new vehicle ratio, having increased the used to new ratio by 9.8% since 2018.

• On average, dealers saw fixed operations revenue grow 5.1% through the third quarter of 2019.  As a result, fixed absorption (service and parts gross profit as a percentage of total fixed overhead expense) increased to the highest level since 2010. Today, dealers are less reliant on the new vehicle department to cover the costs of running their business.

• The fastest growing auto retail groups have greater than 11 dealerships, while those groups with fewer than five dealerships are on the decline. “As the auto retail industry evolves, scale will be a key differentiator and size could be the biggest driver of success,” the report said.