This year’s AutoTeam America Buy/Sell Summit and CEO/CFO Forum at the National Automobile Dealers Association (NADA) Convention and Expo brought together several viewpoints on the state of the industry, including those of publicly traded dealership groups, brokers, bankers, industry analysts and reporters, family funds, private equity groups, attorneys, CPAs, and, of course, dealers.

The overwhelming consensus was that the industry is currently in great health and primed for at least a couple more years of growth and profitability. Participants agreed that the following evidence, as reported by NADA, supports the optimism:

• Average net income per dealership is $1.16 million, which is the highest in more than 10 years.
• The rise in employment in the past few years is fueling more demand for vehicles.
• Low interest rates are turning floor plan expense into a profit center and keeping the cost of capital down on major investments.
• Lower fuel costs are encouraging more driving and increasing demand for bigger, higher-priced, and higher-margin vehicles.
• Total annual miles driven increased over the past two years, which directly correlates to more demand for vehicles.
• The seasonally adjusted annual rate (SAAR) is approximately 17.5 million units and is projected to go to 18 million in 2016.
• Consumer confidence is improving, which is always good for vehicle purchases.

Near-Term Predictions

Growth is expected to continue over the next two or three years due to the factors listed earlier. However, this growth will be somewhat slower than it has been since 2010 as it would be difficult to sustain the rate of growth experienced during that period due to much of the demand already being filled and to production capacity limitations. Analysts nevertheless are predicting that the SAAR could reach as high as 20 million units in the next three years.

“Although the industry remains extremely healthy, its rate of growth is slowing, and a peak in valuation price points likely has been reached.”

Consolidation also is expected to continue. With fewer dealers in the market and more units being sold, the throughput per dealership will continue to increase and drive increased profitability per dealership. In addition, the retail dealership space is attractive for investors because volume, mix, and price all are positive and predicted to stay that way. The industry’s demonstrated ability to not only survive the recent recession but recover from it in an extremely profitable manner paired with the protection provided by strict franchise laws makes dealerships attractive to buyers coming from a range of areas. Berkshire Hathaway’s successful entry into the market further validates for potential buyers that the industry is a strong and viable investment opportunity.

Who’s Buying (Aside From Other Private Dealers)?

While publicly held dealership groups continue to look for strategic opportunities to add stores, recent declines in their stock prices have resulted in them using their capital to buy back their own stock rather than investing in new dealerships. This trend will continue until these dealerships feel they can get a better return from new acquisitions. The result will be fewer new dealer acquisitions in 2016 by publicly owned groups.

Private equity groups (PEGs) have converted from “interested buyers” a year or 18 months ago to active acquirers. The willingness of original equipment manufacturers to approve PEGs as buyers – as long as their group includes a solid and experienced retail dealership management team – coupled with a rate of return PEGs cannot find in other sectors is driving such investments. Berkshire Hathaway entering the market is helping drive PEGs to become acquirers as well.

Likewise, family fund investors also are active in the industry. These investors have a large war chest of capital to invest. Their investments are patient and longer term in nature, and their value proposition is to supply capital and financial know-how to support a dealer management team and, in doing so, provide long-term return to their investors.

Foreign investors also are beginning to demonstrate interest in the industry. This would include large diversified companies and individual entrepreneurs from foreign countries as well as large pension and other such investment funds that are looking to get the 15 to 20 percent returns they feel the industry can provide.

Other Observations

Although the industry remains extremely healthy, its rate of growth is slowing, and a peak in valuation price points likely has been reached. Buyers are looking for a certain rate of return – apparently in the 15 to 20 percent range – and as growth rate projections slow or flatten, it is difficult to justify the current earnings multiples that are being paid in the market. At the same time, sellers’ expectations have been reset by deals closing at healthy prices over the past several months. This recent history may cause a bit of a slowdown in transactions over the next several months while expectations are readjusted.

The used vehicle market remains hot. One reason for this is a high rate of technological advancements in new vehicles. These advancements are released at such a rapid rate that older cars are becoming obsolete faster than ever. Drivers have a greater desire and need to update their vehicles more frequently to keep pace with the new technology.

Much of the technological advances are coming in the area of autonomous power trains. Although most experts agree that autonomous driving (self-driving cars) is still 20 years away, the technological advances that get us closer to such a reality currently are being worked on. Before achieving autonomous driving, many experts believe there first will be more advances in ride sharing. These might involve a suite of vehicles that can be leased from a dealership depending on what the consumer needs that particular week. There seems to be a lot of developmental thinking going on in this area.

Looking Ahead

Given all of the information coming out of the conversations at NADA this year, the next couple of years are expected to be very profitable ones for retail dealers. Acquisition activity will continue to be heavy as a result of the optimistic expectations and the amount of interest and uninvested capital in the markets. However, valuations may start to come down, and economists and analysts are predicting a fairly dramatic downturn as early as 2019. If the predictions hold true, some buyers might decide to remain patient and build war chests during the next two years, which could be used to finance better-priced deals after the predicted downturn.

Alternatively, owners considering a sale in the near future might decide this is the right time to put their stores on the market, ahead of the predicted slowdown. Regardless, it is a very exciting time in the industry as almost all factors point toward a continued robust market.