INCLINE VILLAGE, Nevada – Despite significant economic uncertainty, the auto dealership buy/sell market stayed hot in the third quarter of 2022 with a record 281transactions, 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 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:
- Dealers’ valuation outlook begins to diverge more significantly by franchise
- Scale on a dealership level results in price premiums for higher volume dealerships
- Buyers remain skeptical of OEMs’ plans to disrupt the industry with new technologies and retail strategies
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:
- A record 281 dealership buy/sell transactions were reported through the third quarter of 2022, resulting in 439 transactions for the 12 months ending September 2022.
- The average US dealership earned an estimated $4.24 million, a 205% increase from pre-pandemic levels for the 12 months ending September 2022.
- Kerrigan Advisors’ 2022 Dealer Survey found that 74% of surveyed dealers expect dealership earnings to remain at today’s currently elevated levels or increase to new highs in 2023.
- Almost 50% of dealers surveyed for the 2022 Kerrigan Dealer Survey plan to add one or more dealerships to their group in the next 12 months, while only 2% expect to divest.
- Kerrigan Advisors expects that the fourth quarter will see a decline in buy/sell activity relative to the fourth quarter of 2021 when a record 158 transactions closed, largely due to a reduction in multi-dealership transactions, particularly mega transactions.
- Multi-dealership transactions decreased from 2021’s 35% of total transactions to just 25% in 2022, predominately as a result of the publics’ reduced buying power.
- Import non-luxury franchises sustained market share increases from the first half of the year, comprising 38% of the buy/sell market for the first 9 months of 2022.
- The public auto retailers spent more than $3.2 billion on stock buybacks year-to-date, a 43% increase over the same period in 2021. By contrast, they allocated just 24% of their capital, $1.23 billion, to US dealership acquisitions, a 43% decline from the same period last year.
- Stock price volatility, demonstrated by The Kerrigan Index being down 25% year to date through November, has decreased the publics’ buy/sell market share to 7% from 29% in 2021.
- As of the third quarter, the average blue sky multiple for the industry’s public companies was just 2.9x.
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