IRVINE, Calif. – After rebounding dramatically in the second quarter of 2020, the auto dealership buy/sell market continued to soar in Q3, putting it on track to surpass 2015’s record transaction numbers, according to the just-released Third Quarter 2020 Blue Sky Report® by Kerrigan Advisors. With a flurry of mega dealer transactions, and high dealership earnings, blue sky values shot to unprecedented levels during the quarter.
The resilience of auto sales in the face of the pandemic continues to drive high valuations.
“As we predicted, there was no softening of this record-breaking market,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “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. This created a perfect storm for a white-hot buy/sell environment, one that we predict will surpasses the historic levels of 2015.”
Seventy-three dealership buy/sell transactions were completed in the third quarter of 2020, for a total of 186 transactions for the first nine months of the year, a 15.5% increase over the first nine months of 2019. Despite periods of retail disruption due to COVID-19, 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,” continued Kerrigan.
Through the third quarter of 2020, four of the Top 100 Dealership Groups (4%) have sold either their entire group or the majority of their dealerships, including Kerrigan Advisors’ client Keyes Automotive Group (#20 on Automotive News’ Top 150 List). In fact, the scope of dealership sales managed by Kerrigan Advisors in Q3 is confirmation of the power of this market, with the company advising on the sale of 22 dealerships in the fourth 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. As a result, buyer demand for dealerships is on the rise and dealers are bullish on their valuations.”
This is reflected in 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, with nearly half 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. 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 its multiple outlook from ‘negative’ to ‘steady.’ “Ford’s third quarter profits were impressive,” said Ryan Kerrigan. “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.”
On a less positive note, the one adjustment made to Kerrigan Advisors’ Blue Sky Multiples was 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.
“Overall, today’s dealership buyers believe auto retail sales will outpace the country’s economic growth. 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,” concluded Erin Kerrigan.
Highlights from the Third Quarter 2020 Blue Sky Report® by Kerrigan Advisors include:
- Buy/sell transactions increased 15.5% over the first nine months of 2019
- Seventy-three dealership buy/sell transactions were completed in Q3 2020, for a total of 186 transactions for the first nine months of the year
- There were 46 multi-dealership transactions representing 25% of the buy/sell market
- The publics’ average blue sky multiple at the end of the third quarter was 7.6 times, a 171.4% increase from Q1 2020, as they completed a record level of acquisition spending in the third quarter. Year to date, Lithia and Asbury have spent $1.56 billion on US acquisitions
- Private dealerships’ average blue sky value is $6.9 million, above 2015’s prior high
- Private dealership groups represented 90% of the buyers of dealerships through the third quarter
- Import luxury franchises increased their buy/sell market share in the third quarter -- at the expense of import non-luxury and domestic franchises
- Domestic franchises dominate the buy/sell market with 54% market share
- To date, four of the Top 100 Dealership Groups (4%) have sold either their entire group or the majority of their dealerships
- 33% of dealers surveyed in 2020 expect the value of their dealership to increase in the next 12 months, as compared to 26% surveyed in 2019.
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 over 9,000 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.