INCLINE VILLAGE, Nev. – Here’s potentially a positive record on pace to be set during this tumultuous year.
Kerrigan Advisors reported on Monday that the dealership buy/sell market continued to soar during the third quarter, putting it on track to surpass record transaction numbers established in 2015.
And with a flurry of mega dealer transactions and high dealership earnings, the firm’s Third Quarter 2020 Blue Sky Report also highlighted that blue-sky values shot to unprecedented levels during the quarter, too.
“As we predicted, there was no softening of this record-breaking market,” Kerrigan Advisors founder and managing director Erin Kerrigan said in a news release.
“A 94% year-over-year rise in dealership earnings in Q3 was driven by higher vehicle gross profit margins, reduced operating expenses, limited inventory (which drove up prices) and increased operational efficiency,” Kerrigan continued. “This created a perfect storm for a white-hot buy/sell environment, one that we predict will surpasses the historic levels of 2015.”
Kerrigan Advisors indicated 73 dealership buy/sell transactions were completed during Q3, pushing the total to 186 transactions for the first nine months of the year. That figure represents a 15.5% increase above the amount recorded during the first nine months of 2019, according to data from The Banks Report, Automotive News and Kerrigan Advisors’ research.
Despite periods of retail disruption due to COVID-19, Kerrigan pointed out that 2020 thus far has achieved the highest level of transaction activity since 2015.
“Of particular note were the high numbers of multi-dealership transactions completed in Q3, including mega dealer transactions, representing 25% of the buy/sell market for the first nine months of the year. We expect this trend to continue into 2021,” said Kerrigan, whose firm advised on the sale of 22 dealerships during the past quarter.
According to the Blue Sky Report, public and private dealership valuations exceeded prior highs.
The Kerrigan Index — comprised of the seven publicly traded dealership groups — hit record levels in the third quarter, with the publics’ average blue-sky multiple at the end of the third quarter at 7.6 times, making most private dealership acquisitions highly accretive to earnings.
“The resilience of auto sales in the face of the pandemic continues to drive high valuations,” said Ryan Kerrigan, managing director of Kerrigan Advisors. “Unlike other retail industries which have yet to rebound, auto retail barely missed a beat after the economic disruption in March and April.
“In fact, the industry’s growth rate accelerated in June, while its costs declined, resulting in incredible earnings growth,” Ryan Kerrigan continued. “As a result, buyer demand for dealerships is on the rise and dealers are bullish on their valuations.”
Reinforcing that bullish outlook is Kerrigan Advisors’ second annual dealer survey, which found a rising number of dealers expecting the value of their business to increase over the next 12 months.
The survey also showed nearly half of participating dealers are expecting a rise in buy/sell activity as a result of COVID-19.
The Blue Sky Report, however, emphasizes that, with 2020 earnings being the most volatile on record, buyers are pricing blue sky based on adjusted 2020 earnings, removing profit improvements deemed unlikely to continue in the future and adding back the one-time losses associated with 2020’s period of economic shutdown.
In the report’s analysis of specific brand valuations, Toyota continues to stand out as the most valuable non-luxury franchise.
The firm said Toyota dealers are more optimistic on valuation than any other franchise dealer body, and it commands the highest blue sky multiple amongst non-luxury franchises.
Another franchise showing positive trends is Ford. Kerrigan Advisors upgraded the Blue Oval’s multiple outlook from negative to steady.
“Ford’s third quarter profits were impressive,” Ryan Kerrigan said. “Our dealer survey revealed a significant uptick in Ford dealers’ expectations for valuation improvement. One cannot underestimate the recent impact of Jim Farley’s leadership on buyers’ confidence in Ford’s future.”
Sliding in the opposite direction, the firm mentioned the downgrading of Infiniti’s multiple ranges — from 3.5 on the high end to 3.0 and from 2.5 on the low end to 2.0 — as a result of the franchise’s continued weakness in buyer demand.
To recap, main highlights from the Third Quarter 2020 Blue Sky Report by Kerrigan Advisors included:
“Overall, today’s dealership buyers believe auto retail sales will outpace the country’s economic growth,” said Kerrigan, who added, “2020 marks a stunning reversal of trends that were thought to dampen demand for cars in the long term, including a steep decline in urbanization, ridesharing and public transit, all of which are contributing to sales growth projections for 2021.”
To obtain the complete report or more details about the Kerrigan Index, go to kerriganadvisors.com.
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 280 dealerships representing $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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