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. It includes analysis of all transaction activity for the year, and lays out the high, average and low blue sky multiples for each franchise in luxury and non-luxury segments.
Highlights from the Second Quarter 2019 Blue Sky Report® by Kerrigan Advisors include:
- The buy/sell market moved at a slower pace in the second quarter, with 49 transactions completed.
- The Kerrigan Index™ is up 37.1% through July 2019. Wall Street investors increasingly believe an auto retail investment is a hedge against a potential recession.
- Average dealership earnings increased 1% over the trailing twelve months ending in June 2019, the first increase in dealership earnings since 2015.
- Despite a decline in new vehicle sales, dealers grew their higher margin business segments, resulting in an increase in gross profit and earnings.
- Since 2014, fixed operations and used vehicle gross profits have increased 10.8% and 27.6%, respectively. By contrast, new vehicle gross profits have declined 7.6%.
- Today, fixed operations and used vehicles represent 75.9% of the average dealer’s gross profit, while new vehicles represent just 24.1% of gross profits.
- Domestics continue to increase their share of the buy/sell market at the expense of import non-luxury and import luxury franchises, which both saw their buy/sell market share decline to 22% and 9% respectively in the first half of 2019, the lowest level in five years.
- Rising real estate prices are increasing the total enterprise value of dealerships and more than offsetting any decline in blue sky value.
- Kerrigan Advisors downgrades Nissan and Infiniti high-end multiples, as the OEM prioritizes volume over dealer profitability and maintains punitive stair step programs that distort vehicle pricing, creating earnings volatility within the dealer network.
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The Blue Sky Report® - A Kerrigan Quarterly – Second Quarter 2019 Preview
1. Second Quarter 2019 September 2019
Contact Erin Kerrigan: (949) 439-6768 | erin@kerriganadvisors.com
Contact Ryan Kerrigan: (949) 728-8849 | ryan@kerriganadvisors.com
www.kerriganadvisors.com | (949) 202-2200
Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC
THE
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After a strong start to the year, the buy/sell market moved at a slower pace in the second quarter with 49
transactions completed for a total of 103 transactions closed in the first half of 2019, a 9.6% decrease
over 2018’s first half (see Chart I). Even with the second quarter’s decline, 2019 is tracking to be another
200+ transaction year—the sixth consecutive year at this elevated level. Since 2014, Kerrigan Advisors
estimates 1,000 dealers have sold their businesses, representing 12% of the dealer network.
In the first half of 2019, the industry’s average blue sky value notably reversed its four-year downward
trend (see Chart II on the following page). The slight rise in blue sky was driven by the first increase
in average dealership profits since earnings peaked in 2015 (see Chart III on the following page). This
year’s slight earnings increase, forecasted in Kerrigan Advisors’ prior Blue Sky Reports, highlights
the strength and sustainability of the auto retail business model even in the face of a declining new
vehicle SAAR.
DEALERSHIP ACQUISITION ACTIVITY
Chart I
Number of Completed Dealership Transactions, 2014-2018, First Half 2018 vs. 2019
Source: The Banks Report and Kerrigan Advisors Analysis
Transaction activity
remained strong in the
first half of 2019, though
lower than 2018. Sellers
continue to come to
market at a high rate,
while the buyer pool grows
with new capital seeking
investment in auto retail.
Kerrigan Advisors expects
transaction activity to be
at today’s elevated pace
through the remainder of
2019 and into 2020.
206
242
221
202
216
114
103
2014 2015 2016 2017 2018 First Half
2018
First Half
2019
“The acquisition market continues to be robust.”
Bryan DeBoer, President & CEO
Lithia Motors
Second Quarter 2019 Earnings Call
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Chart II
Average Dealership Blue Sky Value & YoY Change, 2015-2018, First Half 2019, $ in Millions
Source: NADA and Kerrigan Advisors Analysis
Average blue sky
increased slightly
during the first half
of 2019, reversing the
industry’s downward
trend. The increase
was driven by the rise
in average dealership
earnings in the first
half of the year.
$6.8
$6.6
$6.3
$6.1 $6.2
-2.4%
-4.9%
-2.6%
0.8%
$ (0 .1 )
$ (0 .1 )
$ (0 .0 )
$ (0 .0 )
$ 0. 0
$ 0. 0
$ 0. 1
$ 3. 0
$ 3. 5
$ 4. 0
$ 4. 5
$ 5. 0
$ 5. 5
$ 6. 0
$ 6. 5
$ 7. 0
2015 2016 2017 2018 First Half 2019
Blue Sky Value YoY % Change
Average dealership
earnings increased 1%
over the trailing twelve
months ending in June
2019. This is the first
increase in dealership
earnings since 2015 and
is a testament to the
strength of the dealership
business model. Despite
a decline in new vehicle
sales, dealers grew their
higher margin business
segments, resulting in an
increase in gross profit
and earnings.
Chart III
Average Dealership Pre-Tax Profit, 2015-2019 LTM, $ in Millions
Source: NADA
$1.50 $1.47
$1.39 $1.36 $1.37
$ .
$ .2
$ .4
$ .6
$ .8
$ 1.
$ 1.2
$ 1.4
$ 1.6
2015 2016 2017 2018 2019 LTM
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“This is really kind of the proof that the [diversified auto retail] model is playing out.”
John Murphy, Managing Director
Bank of America Merrill Lynch
Second Quarter 2019 Asbury Earnings Call
Auto retail’s diversified business model facilitated a refocus on higher margin business segments,
namely used vehicles and fixed operations. As a result, for the first time since 2014, the average
dealership’s gross profit margin increased and returned to 2014’s level (see Chart IV). Used vehicles
and fixed operations, which earn gross margins 109% and 747% higher than new vehicles, are the
driving force of industry profits and continue to augment dealership gross profit (see Chart V on the
following page), more than overcoming losses in new vehicle sales.
Chart IV
Average Dealership Gross Profit as a Percentage of Total Revenue, 2014-2018, First Half 2019
Source: NADA
11.8%
11.6%
11.4% 11.4%
11.2%
11.8%
2014 2015 2016 2017 2018 First Half
2019
Average dealership gross
margins increased for
the first time since 2014,
as dealers grew higher
margin business segments,
namely used vehicles and
fixed operations. Growth in
both segments resulted in
an increase in dealership
gross profit and ultimately
the first rise in net profits
since 2015.
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Most of the publics also reported record earnings in the second quarter, attributing much of their
growth to used vehicles, fixed operations and F&I sales increases. In their quarterly earnings calls,
the publics noted their continued success augmenting new vehicle gross profits with record F&I
income per vehicle sold (see Chart VI). This is another indication of the industry’s ability to identify
growing profit centers despite reduced new vehicle sales and gross margins.
Chart V
Average Dealership Gross Profit by Department, 2014-2019 LTM, $ in Millions
Source: NADA
Since 2014, fixed
operations and used
vehicle gross profits
have increased 10.8%
and 27.6%, respectively.
By contrast, new vehicle
gross profits have
declined 7.6%. Today,
used vehicles and fixed
operations represent
75.9% of the average
dealer’s gross profit,
while new vehicles
represent just 24.1% of
gross profits.
$1.84
$1.70
$1.58
$1.75
$2.82
$3.60
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
2014 2015 2016 2017 2018 2019 LTM
New Vehicle Gross Profit (incl. F&I) Used Vehicle Gross Profit (incl.F&I)
Fixed Operations Gross Profit
$1,007
$1,080
$1,144
$1,220
$1,264
$1,316
$1,355
$1,425
$1,532
$1,580
2010 2011 2012 2013 2014 2015 2016 2017 2018 First Half
2019
Chart VI
Average Public Dealer Group F&I Gross Profit Per Vehicle Retailed, 2010-2018, First Half 2019
Source: SEC Filings for Asbury Automotive Group, AutoNation, Group 1 Automotive, Lithia Motors, Penske Automotive Group and
Sonic Automotive
The public auto retailers
have successfully
increased their F&I
gross profit per vehicle
sold every year for the
last nine years. These
increases have offset
declines in new vehicle
gross profit and have
helped to grow the
publics’ bottom line.
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Year-to-date, The Kerrigan Index™
is up 37.1% through July 31, 2019. Wall Street investors
increasingly believe an auto retail investment is a hedge against a potential recession.
Unlike the OEMs who experience extreme earnings swings during economic cycles, auto
retailers are consistently profitable through volatile economic periods. Also, the OEM will
likely absorb a disproportionate amount of the economic impact of a trade war, buffering
the retailers from rising tariff costs in order to maintain sales volumes.
Despite recession fears, Kerrigan Advisors expects dealership buy/sell activity to remain strong
for the remainder of 2019. The global trade war has clearly caused uncertainty in the investment
community, leading to a flight to higher quality, less risky assets. Auto retail is emerging as one of
those asset classes. High net worth individuals, family offices and Wall Street investors (see Chart
VII) recognize the counter cyclical measures dealers can take to sustain profitability, namely growing
higher margin business segments. This flexibility enables dealers to remain profitable even when the
new car sales cycle turns south. Auto retail’s nimble model makes the industry a highly attractive
investment in a time of greater economic uncertainty.
“We modeled this thing out all the way down to an 8 million SAAR…and we are confident in
our model that we can continue to grow the business.”
David Hult, President & CEO
Asbury Automotive Group
Second Quarter 2019 Earnings Call
Chart VII
The Kerrigan Index™
, November 2018 – July 2019
Source: Yahoo Finance and Kerrigan Advisors Analysis
Methodology:
The Kerrigan Index™
is composed of the seven publicly traded auto retail companies with operations focused on the US market, including
CarMax, Penske Automotive Group, AutoNation, Lithia Motors, Asbury Automotive Group, Group 1 Automotive and Sonic Automotive.
The Kerrigan Index™
is weighted by the market capitalization of each company and benchmarked at 100 on 1/3/2000.
375
425
475
525
575
625
Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19
37.1% Increase
589.25
7/31/2019
THE
KERRIGAN INDEXTM
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With this overview of the second quarter, Kerrigan Advisors has identified the following three trends,
which we expect to drive the buy/sell market for the remainder of 2019 and into 2020.
ØØ Improvement in dealership earnings steadies blue sky values
ØØ Publics’ stock price appreciation portends future acquisitions
ØØ Lower interest rates support an active buy/sell market
The Blue Sky Report®
is informed by Kerrigan Advisors’ experience enhancing the value of the
industry’s leading dealership groups through the lifecycle of growing, operating and, when the time
is right, selling their businesses. In the past five years, our firm has represented on the sale of the
industry’s largest transactions, including five of the Top 100 Dealership Groups, more than any other
firm in the industry. We do not take listings, rather we develop a customized sales approach for each
client to achieve their transaction and financial goals.
We have had the honor of advising auto retail’s leading families on their growth strategies, capital
allocation plans, operations, real estate and the sale of their valuable businesses. Our team oversees
and manages our client engagements from beginning through a successful outcome. In our view,
dealerships are far too valuable to be advised any other way.
We hope you find the information presented in this quarter’s report helpful to your business. We look
forward to answering any questions you may have regarding The Blue Sky Report®
, The Kerrigan
Index™
or Kerrigan Advisors’ strategic consulting, capital raising and sell-side services.
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THE
BLUE SKY REPORT
A KERRIGAN QUARTERLY
If you would like to read the full report,
please visit our website:
www.kerriganadvisors.com/theblueskyreport