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The Blue Sky Report® - A Kerrigan Quarterly - 2017 Year End
1. 2017 Full Year Report March 2018
Contact Erin Kerrigan: (949) 439-6768 | erin@kerriganadvisors.com
Contact Ryan Kerrigan: (949) 728-8849 | ryan@kerriganadvisors.com
19700 Fairchild, Suite 150 Irvine, CA 92612 | (949) 202-2200 | www.kerriganadvisors.com
Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC
THE
BLUE SKY REPORT
A KERRIGAN QUARTERLY
®
2. When the leading dealers sell,
they call Kerrigan Advisors.
Since 2015, Kerrigan Advisors has sold 60 dealerships, including four of the Top 100
Dealership Groups, more than any other firm in the industry. Kerrigan Advisors’ customized
sale process is effective and proven. If you would like to learn more about our firm,
contact Erin Kerrigan or Ryan Kerrigan at 949.202.2200 or visit KerriganAdvisors.com
3. THE BLUE SKY REPORT® | 3
2017 marked the industry’s fourth consecutive year of over 200 buy/sell transactions. The year included
several deals of notable size such as Gee Automotive’s acquisition of Kerrigan Advisors’ client, the
Tonkin Family of Dealerships, and Lithia Motors’ acquisition of Kerrigan Advisors’ client, Downtown LA
Auto Group, the largest public acquisition of 2017. These sizable, multi-dealership transactions were
indicative of the industry’s consolidation trend, a trend we expect to continue for the foreseeable future.
2017’s high transaction levels surprised some industry observers, many of whom predicted a significant
buy/sell contraction in reaction to the decline in new vehicle sales (down 2% from 2016’s record).
Instead, dealership consolidators remained bullish throughout 2017 in large part due to the resilience of
the dealership business model. As 2017 progressed, dealership profitability remained at or near record
levels with some dealers experiencing continued earnings growth, primarily from fixed operations and
higher margin truck sales.
DEALERSHIP ACQUISITION ACTIVITY
Chart I
Total Number of Completed Auto Retail Transactions, 2014-2017
Source: The Banks Report and Kerrigan Advisors Analysis
Note: A transaction is defined as a single seller and a single buyer, and may include multiple franchises and dealerships.
206
240
221
202
2014 2015 2016 2017
For the fourth consecutive
year, the number of buy/sell
transactions in the US exceeded
200. Since 2014, the industry
has completed over 850 buy/sell
transactions, making this four-
year period one of the most active
in auto retail history. 2018 is
expected to be another year with
over 200 buy/sell transactions.
4. THE BLUE SKY REPORT® | 4
Chart II
Total US New Vehicle Sales versus Truck Sales in Millions, 2010-2017
Source: Automotive News
Chart III
Average Dealership Fixed Operations Revenue, $ in Millions, 2012-2017
Source: NADA
While total US vehicle sales
declined by 2% in 2017, truck
sales (the most profitable
segment of auto retail)
increased an impressive 4%.
Auto retail remained highly
profitable in 2017, partly
due to the growth in higher
margin new truck sales.
11.6
12.8
14.5
15.6
16.5
17.5 17.6 17.2
5.6
6.4 7.0
7.8
8.6
9.9
10.7 11.1
2010 2011 2012 2013 2014 2015 2016 2017
Auto Sales Truck Sales
$5.4
$5.8
$6.2
$6.5
$7.0
$7.2
2012 2013 2014 2015 2016 2017
The average dealership saw
its fixed operations grow
by 3% in 2017. Growth in
fixed operations sustained
the average dealership’s
profitability in 2017.
“It’s still a buoyant industry and the underlying factors that drive it are still very positive.”
Mark LaNeve, US Sales Chief, Ford Motor Company
Commenting on US auto sales, The Associated Press
January 4, 2018
5. THE BLUE SKY REPORT® | 5
Chart IV
The Kerrigan Auto Retail Index, 2017
Source: Yahoo Finance and Kerrigan Advisors Analysis
Methodology: The Kerrigan Auto Retail Index (The Kerrigan Index™) is composed of the seven publicly traded auto retail
companies with operations focused on the US market, namely AutoNation, Penske, Lithia, Asbury, Group 1, Sonic and CarMax.
The Kerrigan Index™ is weighted by the market capitalization of each company and benchmarked at 100 on 1/3/2000.
The economic benefits of consolidation continued to bring new buyers to market in 2017. These new
entrants included a growing number of international auto retailers whose profits are rising as a result of
global auto sales growth (global light-vehicle sales are on track for a record 97.3 million units in 2018).
These international buyers are motivated by the tremendous consolidation opportunity in the US auto
retail market, considered by many to be the most fragmented in the developed world.
Blue sky multiples likewise remained steady. The best indication of industry valuation stability can be
seen in The Kerrigan Index™. Even in the face of declining auto sales, the index of the public US auto
retailers remained relatively stable throughout 2017.
6. THE BLUE SKY REPORT® | 6
In addition to economies of scale, many of the largest acquirers were focused on economies of scope
in 2017, diversifying beyond new vehicle sales and vertically integrating their businesses to capitalize
on changes in the auto retail business model. In some cases, these buyers expanded their geographic
reach with the expectation of increasing profits by integrating new business lines and products into
new markets, a trend we will discuss further in this report.
An equally important factor of 2017’s active buy/sell market was the growing number of sellers coming
to market as the year progressed. Inundated by industry headlines about industry disruption, some
dealers reassessed their succession plan in 2017. These dealers became increasingly concerned about
the next generation’s ability to manage and retain enterprise value in a changing auto retail market.
Many believe only the largest, or most innovative, groups will successfully navigate auto retail’s evolution
and are motivated to capitalize on today’s high values. The increase in sellers coming to market was
particularly noticeable in the second half of the year, as disruption talk mounted.
High net worth individuals and family offices also sought investments in auto retail in 2017, partnering
with or backing successful dealers. All of these new entrants are highly attracted to the economies
of scale available through meaningful consolidation, particularly as it relates to sales, general and
administrative expenses.
Chart V
Sales, General and Administrative Expenses as a Percentage of Gross Profit, 2017
Source: NADA, Public Company Filings and Kerrigan Advisors Analysis
SG&A as a percentage of gross profit
is 17% lower for the average public
company as compared to the average
US dealership. These savings drop
directly to the bottom line and make a
consolidation strategy highly lucrative.
89%
74%
Average Dealership Publics
7. THE BLUE SKY REPORT® | 7
$874
$1,138
$1,229
$1,284
$1,382
$1,503 $1,467
$1,395
$329
$446 $437 $436 $444
$473
$276
$92
$ 0
$ 1 0 0
$ 2 0 0
$ 3 0 0
$ 4 0 0
$ 5 0 0
$ 6 0 0
$ 7 0 0
$ 8 0 0
$ 0
$ 2 0 0
$ 4 0 0
$ 6 0 0
$ 8 0 0
$ 1 ,0 0 0
$ 1 ,2 0 0
$ 1 ,4 0 0
$ 1 ,6 0 0
2010 2011 2012 2013 2014 2015 2016 2017
Earnings Operating Profit
Chart VI
Average Dealership Profit Before Tax vs. Operating Profit, $ in 1,000s, 2010-2017
Source: NADA
Manufacturer facility requirements also drove an increasing number of sellers to market in 2017. In an
era of Amazon, some dealers are increasingly skeptical of the economic benefits associated with brick
and mortar investments and are fearful of the business risks from rising rents (average dealership rent
is up 37% since 2010). These dealers do not believe their investments in real estate at this stage in
the economic cycle will provide an acceptable return on investment and are worried high rents could
handicap their ability to navigate a future economic downturn.
Some of 2017’s sellers also cited growing concern over dealers’ reliance on OEM incentives to support
dealership profitability, as seen in Chart VI below. The incredible decline in dealership operating
profits in 2017 (down 81% since 2015) demonstrates dealers increasing dependence on OEM stair-step
programs and below the line money to make their business models viable. Should the OEM change
their incentive programs, dealership profitability would be dramatically affected, limiting a dealer’s
control of their future profits and ultimately affecting valuation.
$795
$766
$746
$737
$780
$815
2012 2013 2014 2015 2016 2017
Chart VII
Average Dealership Rent per New Vehicle Sold, 2012-2017
Source: NADA
8. THE BLUE SKY REPORT® | 8
“We’re just not going to get caught up in the game of building these facilities like we’ve
been asked to build in the past. We’re just not going to make those investments unless the
investment warrants it and we’re not going to be bullied into that situation either.”
Jeff Dyke, Executive Vice President Operations, Sonic Automotive
2017 Fourth Quarter Earnings Call
With this backdrop, Kerrigan Advisors expects a very active buy/sell market in 2018. The trends which
drove an increasing number of buyers and sellers to market in 2017 are expected to continue in 2018.
In addition, Kerrigan Advisors has identified the following three market trends, which we predict will
meaningfully impact the buy/sell market in 2018 and beyond.
ØØ Tax reform benefits auto retail and results in increased buy/sell activity
ØØ Dealers’ investment strategies shaped by auto retail’s expected evolution
ØØ Dealership profit variability widens blue sky pricing ranges
The Blue Sky Report®
is informed by Kerrigan Advisors’ experience representing our sell-side and
consulting clients in today’s buy/sell market, as well as research conducted by our firm. Kerrigan
Advisors is the most active, licensed sell-side advisor to auto dealers in the industry. Since 2015,
we have advised on the sale of 60 dealerships, including four of the Top 100 Dealership Groups in the
US, more than any other firm in the industry. Our firm works exclusively for sellers of higher value
dealerships and dealership groups. We provide both sell-side advisory services and consulting services
to assist our clients as they consider their strategic options for their business.
We have had the pleasure of working with auto retail’s leading families in determining the right time to
sell and the most appropriate buyer for their dealerships. We do not take listings or maintain inventory,
rather we develop a customized, professional sales approach for each client to maximize transaction
proceeds. Our team personally oversees and manages our client’s sale process from the beginning to
a successful closing. In our view, dealerships are far too valuable to be sold 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’ sell-side and consulting services for auto dealers and their families.
9. THE
BLUE SKY REPORT
A KERRIGAN QUARTERLY
If you would like to read the full report,
please visit our website:
www.kerriganadvisors.com/theblueskyreport