As a new year begins at dealerships across the U.S., Kerrigan Advisors sees a mixed bag for valuations of certain brands.

The good news is for Toyota, Honda, Subaru, Porsche and Lexus multiples dealerships whose value are expected to increase. For the third quarter 2023, Kerrigan Advisors increased the multiple outlooks for those five, joining Kia as those most likely to see improvements in valuation in the coming year.

Kerrigan’s Third Quarter 2023 Blue Sky Report released last month spotlighted Toyota continuing to outperform on every level.

Toyota Tops

“Toyota is the most trusted franchise by dealers, with an incredible 72 percent of dealers surveyed having a high level of trust in the franchise,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors in a press statement. “This monumental lead in the trust equation has resulted in the franchise having the highest expected increase in profits as a result of the OEM’s retailing changes and the highest buyer demand in Kerrigan Advisors’ buyer database.”

On the other end of the spectrum in the dealership market is Ford, as their multiple was reduced by 0.25 on the high-end to 3.25.  Additionally, Ford is the non-luxury franchise least expected to see a rise in valuation in the next 12 months and remains the franchise most expected to see a decline in value because of the OEM’s changes to its retail model, according to Kerrigan.

These results reflect dealers’ lack of trust in the OEM with Ford ranking as the least trusted franchise, which industry observes associate with a notable rise in Ford dealers seeking a sale.

Bad News for CDJR

Besides Ford, Kerrigan downgraded the outlook for three other franchises—Nissan, CDJR and Lincoln—driven by their poor results in the 2023 Kerrigan Dealer Survey on the question of trust.

Most notably in the survey, CDJR saw a significant increase in dealers expecting the franchise to decline in value, to 53% in 2023 from 24% in 2022—a 29-percentage point increase.

Kerrigan Advisors said the negative dealer sentiment was driven by three factors: rising inventory levels, lack of incentive spending and 39% of dealers having no trust in CDJR, placing the OEM as the fourth least trusted franchise.

Looking towards 2024

According to the sell-side advisors, three trends they see will impact the buy/sell market over the next 12 months:

• 2019 financial performance increasingly irrelevant to valuation;
• Leasing dealership real estate (versus buying) becomes more economic; and
• OEMs’ EV strategies impact future franchise profitability and blue sky value

Ryan Kerrigan, Managing Director of Kerrigan Advisors, stated that pre-pandemic performance is increasingly irrelevant when assessing franchise value.

“2019’s dealership financial performance is not only almost four years old, but also a reflection of a very different retailing environment,” said Ryan Kerrigan. “Buyers who seek to superimpose 2019 earnings as a replacement for projecting normalized earnings are overlooking the substantial and evolving differences between the pre- and post-pandemic auto retail business model.”

Changes Post Pandemic

What has changed post-pandemic is significantly improved operational efficiencies after dealers heavily scrutinize operating expenses, particularly employee productivity. Now with fewer employees producing more revenue, auto retail has become increasingly reliant on big data and technology to optimize sales.

Kerrigan points to Hyundai’s November announcement of its Amazon partnership for the sale of new vehicles. With the AI revolution, auto retailing will undoubtedly continue to change—making anything pre-2019 a historical way of retailing that is no longer applicable.

The other driver of dealership valuations is the electric vehicle (EV) market as dealership buyers are increasingly limiting the number of EVs they are willing to purchase, concerned about exposure to low-demand devaluing inventory.

The Drag of EVs

Dealers, who have appealed to the Biden Administration to tap the brakes on his plan for EVs, are sitting on over 100 EV days’ supply as consumers are turned off due to the high price tags and logistical challenges associated with EV ownership. A low demand environment for EVs, with a resulting increase in EV discounting at the dealer level, led by Tesla, has reduced prices 22% year-over-year per Kelley Blue Book.

In the next two years, Kerrigan Advisors sees the auto retail industry approaching a challenging tipping point in EV sales, especially in the 15 California Air Resources Board (CARB) states.

“The government mandated transition to EVs will likely have major implications for franchise values, depending not only on the success of an OEM’s sales strategy, but also on location,” continued Ryan Kerrigan. “With CARB states currently mandating that 35% of OEM sales be zero emissions by 2026, OEMs will have a financial incentive to send the majority of their EV vehicles to those states…resulting in greater disparities in EV and ICE availability from state to state.”

“This disparity could lead to monumental differences in dealership profitability based on location and, ultimately, greater gaps in franchise value, adding a new variable to blue sky valuation,” he stated.