According to Third Quarter 2022 Blue Sky Report® by Kerrigan Advisors, dealership buy/sells increase 25% YoY as auto retailers overcome economic headwinds to achieve a 205% increase in earnings compared to pre-pandemic averages; dealers focus on expansion through acquisition with almost 50% planning to add one or more store, but low stock prices dampen public auto retailers buy/sells
INCLINE VILLAGE, Nev.–(BUSINESS WIRE)–Despite significant economic uncertainty, the auto dealership buy/sell market stayed hot in the third quarter of 2022 with a record 281 transactions, according to the just-released Third Quarter 2022 Blue Sky Report® by Kerrigan Advisors. Completed dealership buy/sells increased 25% compared to the first nine months of 2021; and, for the 12 months ending September 2022, the buy/sell market recorded 439 completed transactions – an industry high. During the same time period, the average US dealership earned an estimated $4.24 million, a 205% increase from pre-pandemic levels.
The strong performance comes in the face of elevated inflation, rising interest rates and a volatile stock market, underscoring the countercyclical nature of the auto retail business model and the reason dealers continue to seek expansion. According to the 2022 Kerrigan Dealer Survey of over 600 dealers, nearly 50% plan to add one or more dealerships to their group in the next 12 months, while only 2% expect to divest. High volume dealerships, which benefit from sustainable earnings margins because of dealership-level economies of scale, according to the report, are in particular high demand and selling at a price premium.
“We see the current market as a robust seller’s market, one that will persist into 2023,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “There’s a significant capital surplus on dealers’ balance sheets. The industry is on pace for a third consecutive year of record earnings, despite declines in used car margins and some new car margins. Improvements in sales volumes, increases in fixed operations, and improved employee productivity have resulted in rising profits and have more than offset inflationary pressures and interest rates increases.”
With the industry entering its fourth year of historically high profits, buyers are beginning to adjust to the “new normal” of higher profits when valuing dealerships, basing valuation on elevated post-pandemic earnings, and discounting the possibility of a return to pre-pandemic levels. This calculus spurs an expectation that today’s higher blue sky values will sustain into 2023, consistent with the results of the Kerrigan Dealer Survey where the majority of dealers project unchanged valuations next year. These expectations are in line with the premium valuations Kerrigan Advisors continues to achieve on behalf of the firm’s clients.
Despite these positive expectations from most private dealers, public auto retailers’ acquisition activity decreased dramatically to 7% of buy/sell market share, from 29% in 2021, as their stock prices have declined. The Kerrigan Index (of the seven publicly traded US auto retail companies) was down 25% year-to-date through November, underperforming the S&P 500 by 76%. Blue sky multiples for publics now average just 2.9 times, compared to 8.0 times at their peak in 2020. The softening of the public groups’ buying power also led to a reduction in multi-dealership transactions for the third quarter which, Kerrigan Advisors expects, will lead to lower transaction activity in the fourth quarter 2022.
“Wall Street is reacting to the near-term impact of a potential recession and monitoring certain data points that could lead to a decline in dealership earnings, specifically inflation and interest rates,” continued Erin Kerrigan. “Despite pent-up consumer demand, some fear new car sales could remain at today’s depressed levels, even if supply improves, due to softening consumer demand caused by rising interest rates and declining affordability.”
In spite of recessionary risks, Kerrigan points out that there are reasons to be optimistic that OEMs will not revert to oversupplying the market this time. Since the pandemic, OEMs have seen that their greatest profitability comes from appropriately supplying the market with vehicles. Ryan Kerrigan, Managing Director at Kerrigan Advisors, notes, “We believe this supply discipline will result in lower days supply going forward and help to sustain higher new vehicle gross margins, providing some counterbalance to any decline in demand as a result of a recession.”
Third Quarter 2022 Buy/Sell Trends
Kerrigan Advisors has identified the following three trends which it expects to meaningfully impact the buy/sell market for the remainder of the year and into 2023:
Kia and Hyundai Multiples Increase; Ford Sees Reduced Multiple; Honda’s Multiple Outlook Changed from Steady to Negative
For the third quarter of 2022, Kerrigan Advisors increased the multiples for Kia and Hyundai to 4.0 on the low-end and 5.0 on the high-end and reduced Ford’s multiple to 3.25 on the low-end and 4.25 on the high-end. For the first time, Kia and Hyundai franchises surpassed Toyota in the fourth annual Kerrigan Dealer Survey to become the franchises most expected to increase in value in 2023. This is consistent with rising buyer demand based on Kerrigan Advisors’ transaction work nationwide.
“Buyers are impressed with Kia and Hyundai’s ability to increase market share, grow their UIO count, and remain disciplined with their dealer network,” said Ryan Kerrigan. “We see this resulting in rising sales per franchise. Kia and Hyundai have worked closely with their dealer body to grow market share and maintain their tremendous profit improvement since the pandemic.”
Ford’s reduced multiple is mostly due to the barrage of announcements regarding changes to its retailing model with the rollout of EVs. While some higher volume dealers and top groups show optimism for the franchise, the majority of dealers, especially smaller dealers, have a negative outlook on the new sales structure and the investment requirement. Almost 60% of dealers surveyed by Kerrigan Advisors believe Ford’s planned changes to their dealer model will have a negative impact on future franchise profitability. With this multiple adjustment, Kerrigan Advisors retains a negative outlook on Ford’s blue sky multiple given the risk of declining buyer demand for the franchise.
Kerrigan Advisors also downgraded the outlook for Honda’s blue sky multiple this quarter. Honda had the largest decline of any import franchise in Kerrigan Advisors’ 2022 Dealer Survey and was the second worst performer behind Ford, when compared to the 2021 survey results. Kerrigan Advisors believes this negative sentiment is primarily a result of Honda’s market share loss due to significant sales declines, most notably relative to Kia and Hyundai.
Highlights from the Q3 2022 Blue Sky Report® by Kerrigan Advisors include:
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. The quarterly report, received by nearly 10,000 industry recipients in 35 countries, 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. For more details and to preview the report, click here. To sign up to receive the quarterly report, click here.
Kerrigan Advisors 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.
Kerrigan Advisors is the leading sell-side advisor and thought partner to auto dealers nationwide. Since its founding in 2014, the firm has led the industry with the sale of over 275 dealerships representing nearly $9 billion in client proceeds, including the third largest transaction in auto retail history – the sale of Jim Koons Automotive Companies to Asbury Automotive Group. 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. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, Kerrigan Advisors does not take listings, rather they develop a customized sales approach for each client to achieve their personal and financial goals. In addition to the firm’s sell-side advisory services, Kerrigan Advisors also provides a suite of consulting and investor 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 Dealer Survey, click here. To read the 2024 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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