Blue sky values rise driven by record first quarter dealership profits; growth in fixed operations expected to counteract potentially softening consumer demand, bolstering dealership confidence and profits; continued buy/sell market and valuation strength expected in 2022, especially for Lexus and Toyota, according to the First Quarter 2022 Blue Sky Report® by Kerrigan Advisors
INCLINE VILLAGE, Nev.–(BUSINESS WIRE)–#KerriganAdvisors–The auto dealership buy/sell market is off to a powerful start in the first quarter of 2022, significantly outpacing the first quarter of 2021, according to the just-released Blue Sky Report® by Kerrigan Advisors. The 72 dealership buy/sell transactions reported in the first quarter resulted in a record 389 transactions1, representing 829 franchises, for the twelve months ending March 2022. During the quarter, average dealership blue sky values increased to a new record of $11.5 million, an improvement of 4.6% over the end of 2021, mostly driven by a continued rise in quarterly dealership profits, which surpassed the first quarter of 2021 by an estimated 27%.
In spite of potential economic headwinds, Kerrigan Advisors expects that 2022 will be another very active year for the buy/sell market with high valuations, constrained only by the supply of dealerships available for sale and supported by a highly profitable auto retail market.
“It was another extraordinary quarter for the buy/sell market, even in the face of turmoil in the financial markets,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “If this transaction pace continues, nearly every dealership in the US would trade hands in the next 20 years, leading to fewer single point dealers and a much higher concentration of vehicle sales amongst the leading consolidators.”
Regarding today’s inflationary environment, The Blue Sky Report expects that auto retail may benefit as the price of consumers’ trade-in vehicles appreciates, providing higher levels of vehicle equity. In addition, the industry’s high variable cost structure means inflationary costs will not immediately impact the operational expenses of a dealership. Furthermore, the report notes, a tailwind is expected from the highest margin business segment in auto retail, fixed operations – as miles driven rebounds and the US vehicle fleet continues to age. Resulting service and parts sales will bolster earnings, even if consumer demand for vehicles softens.
“As a result of the auto industry’s structural advantages against inflation, combined with pent-up consumer demand and improved operational efficiencies from technology, Kerrigan Advisors expects auto retail earnings to outperform the broader US retail market this year, giving both public and private dealers tremendous cash flow to continue their acquisition expansion plans,” continued Kerrigan. “Most dealers are confident in the strength of today’s dealership business model which has historically remained profitable even during periods of recession. As a result, a vast majority of dealers today are buyers, not sellers.”
The Publics Increase Acquisition Spending on Dealerships
Of note in the report is the 40% increase in acquisition spending by the public auto retailers in Q1 2022, relative to the first quarter of 2021. For example, Lithia, Penske, and Group 1 acquired nine dealerships for a total of $606 million, averaging $67 million per dealership purchased. In the trailing twelve months as of March 2022, the publics spent nearly $9.2 billion on acquisitions as their combined net income hit a record $5.8 billion. “The publics high levels of liquidity, combined with relatively low debt to equity ratios, can facilitate the financing of future acquisitions,” said Kerrigan.
First 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 2022:
- Buyer demand for Toyota and Lexus franchises far surpasses other franchises.
- Rising interest rates expected to temper blue sky and real estate appreciation.
- Industry fragmentation provides acquisition opportunities for groups seeking market leadership.
Toyota / Lexus Strength
According to the report, despite the expected retail model changes coming to the market, dealers have confidence in Toyota and Lexus based on the OEM’s operating philosophy that a highly profitable dealer body results in a highly profitable OEM. This is proven out as Toyota, which continues to be the best-capitalized OEM with the highest credit rating amongst its competitors and the greatest level of liquidity, gained market share in the first quarter, cementing its position as the number one automaker in the US.
“Toyota/Lexus’ win/win approach makes an investment in these franchises, even during times of uncertainty, even more attractive to well-funded buyers,” said Ryan Kerrigan, managing director of Kerrigan Advisors. “We find that buyer demand for Toyota and Lexus franchises is rising exponentially and is currently a step-function above other franchises. As a result, we have increased Toyota’s blue sky multiple range to 6.5 to 7.5 and Lexus’ blue sky multiple range to 7.5 to 9.0.”
Rising Interest Rates
Rising rates will have an immediate impact on investors’ cost of capital and return on investment expectations, says the report, likely resulting in lower blue sky multiples in the future. While dealership earnings in 2022 are expected to exceed 2021, blue sky values are projected to rise at a slower pace and potentially plateau by the end of the year. Meanwhile, dealership real estate, like blue sky values, will also feel the impact of investors’ rising cost of capital, which could ultimately lead to lower appraisals, despite higher rents.
Industry Fragmentation
The Blue Sky Report notes that the auto retail industry is the largest, most fragmented retail industry in the US. In 2021, total US dealership revenue represented the highest percentage of total retail sales of any sector at 17% — 90% of which was produced by approximately 8,000 franchised dealers.
“Kerrigan Advisors expects capital will continue to flow to auto retail because few industries provide the opportunity to profitably expedite market leadership,” continued Ryan Kerrigan. “The catalyst of industry change in the form of digital retailing, electrification and OEM agency models is expected to accelerate consolidation across the next decade, resulting in more large groups and fewer single- point dealers.”
Blue Sky Multiple & Outlook Adjustments
In the first quarter of 2022, Kerrigan Advisors also increased the blue sky multiple for BMW, in addition to the increases for Toyota and Lexus. All three franchises will see their blue sky multiple outlooks moved to steady for the remainder of the year, as Kerrigan Advisors does not expect further increases due to rising interest rates.
Highlights from the Q1 2022 Blue Sky Report® by Kerrigan Advisors include:
- 72 dealership buy/sell transactions, representing 125 franchises, were completed in the first quarter of 2022, a 9.1% increase over the first quarter of 2021.
- A record 389 transactions closed through the trailing 12 months as of March 2022, representing 829 franchises.
- Average dealership blue sky values rose to a record $11.5 million in the first quarter of 2022, a 4.6% increase over the fourth quarter of 2021, driven by record dealership profits.
- 22 multi-dealership transactions, representing 31% of the buy/sell market, closed in the first quarter.
- Private buyers acquired 92% of franchises sold with the top 144 private dealership groups increasing their share of the buy/sell market to 18%, up from 13% in 2021.
- Domestic franchises saw their share of the buy/sell market rise; CDJR, Ford and Chevrolet led with a total of 45.6% buy/sell market share.
- Toyota represented 11.2% of the buy/sell market in the first quarter, more than any other import franchise.
- The publics’ spending on acquisitions increased by 40% in the first quarter of 2022 versus the first quarter of 2021.
- The publics spent nearly $9.2 billion on acquisitions in the trailing twelve months as of March 2022, a record.
- The publics acquired as many dealerships as they sold, with Group 1, Asbury and Lithia selling a total of nine dealerships
- The Kerrigan Index is up 223% from March 2020 lows, outperforming the S&P 500; however, it is down 21% from its 2021 peak, reflecting public market concern about softening consumer demand.
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.
About Kerrigan Advisors
Kerrigan Advisors is the premier sell-side advisor and thought partner to auto dealers in the US. The firm advises auto dealers nationwide, enhancing value through the lifecycle of growing, operating and monetizing their businesses, as well as offering restructuring and turnaround consulting services. Kerrigan Advisors has had the honor of representing the industry’s largest transactions, including more Top 150 Dealership Groups than any other firm in the industry. Led by a team of veteran industry experts, the firm does not take listings, rather Kerrigan Advisors develops a customized approach for each client to achieve their personal and financial goals. In addition to Kerrigan Advisors’ sell-side advisory and capital-raising services, the firm also provides a suite of consulting services including growth strategies, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate analysis.
Kerrigan Advisors publishes The Blue Sky Report®, which is the auto industry’s most comprehensive and authoritative quarterly report of dealership buy/sell activity and franchise values, received by nearly 10,000 industry participants in 35 countries. To register to receive The Blue Sky Report®, click here. Kerrigan Advisors also publishes The Kerrigan Index™, the only monthly report tracking the seven publicly traded auto retail companies. To access The Kerrigan Index™, click here.
1 Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Contacts
Kerrigan Advisors Media Contact:
Melanie Webber (melanie@mwebbcom.com), mWEBB Communications, 949-307-1723
