IRVINE, Calif. – The auto dealership buy/sell market rebounded dramatically in the second quarter of 2020, driving the first half of 2020 to surpass the first half of 2019, in spite of declines in Q1 2020, according to the just-released Second Quarter 2020 Blue Sky Report® by Kerrigan Advisors. Valuations are now at historic highs and, with dealership earnings at record levels, Kerrigan Advisors predicts that the second half of 2020 could be the most active buy/sell market ever.
Many investors believe auto retail will benefit from the growing demand for personal mobility as the virus exposes the potential health risks of public transportation and ridesharing.
With 58 dealership buy/sell transactions in the second quarter of 2020, the overall transaction count for the first half of 2020 reached 113, a 9.7% increase over the first half of 2019. This positions the first half of 2020 nearly in line with 2018’s elevated level, despite the global economic shutdown as a result of COVID-19. This activity level, according to the report, was driven by a rebound in industry profits, an increase in sellers coming to market, and stronger buyer demand.
“We had predicted an uptick in the buy/sell market in the second half of 2020, but the remarkable boomerang of dealership earnings in Q2 brought the buy/sell rebound on even more rapidly, once again proving the resilience of the auto retail business model,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “We saw buyers become increasingly motivated, fueled by strong cash flow from existing operations and low-cost acquisition financing in a declining interest rate environment. Meanwhile, the increasing volume of sellers coming to market was fueled by confidence in their valuations as reduced expenses and higher profits led earnings to exceed pre-COVID levels.”
As industry earnings rebounded throughout the quarter for both the public and private dealers, so too did valuations, according to the report. With average dealership real estate values up 14.9% since 2015, dealership enterprise values, including real estate and blue sky, are now at peak levels.
According to the Blue Sky Report®, the average dealership blue sky increased 3.3% in the second quarter compared to 2019, as buyers priced acquisitions based on pre-COVID earnings and post-shutdown expectations. The report projects that blue sky values will increase in the second half of 2020, a result of historically low interest rates and a reduction in buyers’ cost of capital.
“Many investors believe auto retail will benefit from the growing demand for personal mobility as the virus exposes the potential health risks of public transportation and ridesharing,” continued Kerrigan. “In addition, the business disruption of COVID-19 spotlighted the benefits of economies of scale in a consolidating auto retail environment, as well as the competitive advantage of innovative retailing. We believe these factors will exponentially increase future industry profits, rendering a consolidation strategy highly profitable for investors.”
Kerrigan Advisors identified the following three trends, which are expected to meaningfully impact the buy/sell market for the remainder of 2020 and into 2021:
- Valuations rise as dealership earnings grow and buyers’ cost of capital declines
- More sellers come to market driven by high values and the threat of industry disruption
- High growth, business friendly regions attract a disproportionate number of buyers
Highlights from the Second Quarter 2020 Blue Sky Report® by Kerrigan Advisors include:
- Buy/sell transactions increased 9.7% in first half of 2020, with 113 transactions closing compared to 103 transactions during the first half of 2019
- Multiple factors led to a positive environment for the Q2 buy/sell market, including an increase in industry gross profits per new vehicle of 70.3% in June 2020, compared to January 2020, with average dealership pre-tax profit increasing 26.1% in May/June YOY
- Multi-dealership transactions represented 23% of the buy/sell market in the first half of 2020
- Domestics increased their buy/sell market share in the first half of 2020, approaching their franchise market share of 67%
- The publics’ acquisition spending declined 21% in the first half of 2020. Based on recently announced acquisitions by Asbury and Lithia, spending levels are expected to rise in the second half of the year
- The Kerrigan Index™ increased 150% from the beginning of March to the end of August, outperforming the S&P 500 by 165.5% and achieving an all-time high of 766.40 on August 18th
- Private buyers continue to lead auto retail’s consolidation, acquiring 97% of the franchises sold in the first half of 2020
- For the second quarter of 2020, Kerrigan Advisors’ assessment of blue sky multiples remained relatively stable. The average blue sky multiple for the industry was 4.47 times
- Kerrigan Advisors made the following adjustments to its blue sky multiples:
- The low-end blue sky multiple for Kia and Hyundai increased to 3.0 from 2.5, primarily due to increased buyer demand
- Nissan’s high-end multiple decreased from 3.25 to 3.0. The franchise continues to struggle resulting in more Nissan franchises available for sale than buyers interested in acquiring them