Transaction of auto dealerships continue to break records with 2024 expected to exceed 400 transactions, according to the latest quarterly report from Kerrigan Advisors.
In the first quarter of 2024, there were 109 completed dealership transactions completed representing 233 franchises sold, up 38 percent from a year earlier, the just-released First Quarter 2024 Blue Sky Report by Kerrigan Advisors found.
Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors, offered the increase was driven by the number of sellers coming to market, without a accompaniment rise in buyers. This has led to a buyers’ market for the first time since the pandemic.
Dealership Sales in Q1 2024
“The 2024 buy/sell market remains robust, hitting new records despite high interest rates and declining industry profitability,” said Kerrigan with the release of the report. “This burgeoning buyers’ market is putting additional downward pressure on blue sky values, particularly as dealership earnings retreat further from their pandemic-induced high.”
“As earnings trend downward, more private dealers are deciding to exit, particularly while their blue sky valuations remain above pre-pandemic levels,” she added.
Through the first quarter of 2024, Kerrigan Advisors estimates average dealership earnings declined 7 percent, resulting in average industry net to sales of 4.5 percent, 2.2 percentage points below 2022’s peak. Much of the earnings decline is a result of softening new vehicle margins, which ended the quarter 35 percent lower than 2022, due to increasing new vehicle inventories.
The index remains 80 percent higher than 2019, when Kerrigan first began issuing their reports.
Toyota, BMW Multiples Increased
For the first quarter of 2024, Kerrigan Advisors increased the multiples for Toyota and BMW as both OEMs capitalize on successful rollouts of hybrid EV models.
Toyota is now leading the industry in hybrid sales with 37 percent market share in the first quarter, resulting in a 21 percent increase in total vehicle sales, outperforming the industry by an eye-popping 279 percent. Kerrigan increased Toyota’s multiple .25 to a range of 6.75 to 7.5.
“As a reflection of Toyota’s dominant position in the market, the company’s share price surged in the first quarter of 2024 as Tesla’s has declined since the summer of 2023, validating Toyota’s measured approach to the EV transition,” said Erin Kerrigan. “It’s not surprising that buyer demand for Toyota franchises has increased, resulting in higher blue sky multiples as profit growth expectations for the brand continues to outperform the overall industry.”
Stellantis Turn Down
Conversely, Kerrigan Advisors reduced its outlook for Stellantis as CDJR continues to underperform the industry in terms of sales and an overabundance of inventory.
As a clear indication of weak buyer demand, Stellantis franchises in strong growth markets are seeing sharp declines in blue sky values, separating itself from the other two domestic franchises which are seeing greater stability in the market.
As a result, Kerrigan lowered its outlook for Stellantis to negative and its blue sky multiple range to 3.75 from 3.0.
Kerrigan Report Highlights
Among other details from Kerrigan’s report:
- Dealership earnings continue to decline from their pandemic-induced highs, although 97 percent above 2019 levels.
- Top import franchises in economically vibrant markets continue to capture record valuations, particularly in Texas and Florida. Buyer demand for these rare assets remains strong due to sustained levels of above average profitability supported by robust population growth.
- The U.S. public dealer groups’ average blue sky multiple reached 5.3x at the end of the first quarter of 2024, a 47 percent increase from 3.6x a year ago, driving a dramatic increase in acquisition spending (totaling $1.19 billion in the first quarter of 2024).
2024 Buy/Sell Trends
Looking forward, Kerrigan Advisors forecasts private dealers tapping into outside equity partners to accelerate growth through acquisition, captive finance companies increasingly critical to franchise profits and value and fixed operations driving industry profits and blue sky
Through 2023, the number of dealerships owned by private groups with outside capital is up 45 percent from 2021. When annualizing first quarter 2024 data, the average dealership achieved 23 percent return on equity, outperforming the S&P 500 by 110 percent and on average. Auto retail returns have outperformed the overall S&P 500 by 92 percent on an annual basis since 2016.
Auto retail has proven its case and will draw more capital from outside the industry as consolidation accelerates, according to Ryan Kerrigan, Managing Director of Kerrigan Advisors. He added that with these investment returns outside capital investors, including family offices, high net worth individuals and private equity firms are actively seeking increased financial exposure to the industry.
“Many of these sophisticated investors are attracted to the tremendous consolidation opportunity presented by auto retail’s highly fragmented structure,” said Ryan Kerrigan. “As of the end of 2023, just 24 percent of dealerships were owned by the top 150 dealership groups, representing 30 percent of industry sales.”
Profit Drivers
The dealership buy/sell advisory firm noted fixed operations (service and parts) will drive industry profits and blue sky values in 2024. Fixed operations yields the highest profit margin in the business and its sales growth has outpaced vehicle sales for the last two years.
Ultimately, dealerships with the strongest fixed operations and high fixed absorption rates are less reliant on cyclical vehicle sales, making their projected future earnings more reliable and leading to higher blue sky values.
Kerrigan’s Blue Sky Report 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.
