Are clouds planned for Blue Sky dealer values?

It’s hard to say when, but auto dealership values ​​could top, says dealership broker Erin Kerrigan.

Kerrigan, Founder and Managing Director-Kerrigan Advisors of Irvine, Calif., says the key question is: How long can dealers sustain record profits?

“Are blue sky values ​​peaking? is the provocative title of Kerrigan’s September 13 webinar, hosted by the American International Automobile Dealers Assn. “They could be,” she said in response to her own question after the event. “It’s impossible to predict, given the continued record profitability.”

Blue sky is the industry term for the amount a dealership buyer pays in addition to the value of a dealership’s physical assets. The better the outlook for future earnings, the higher the blue sky, Kerrigan (photo below left) said.

In the second quarter of 2022, the average blue sky in a buy-sell at a dealership was estimated at $12.1 million, compared to $11 million in 2021. This is also almost double the average of 6.4 million dollars in 2019 before the pandemic, according to Kerrigan Advisors.

At the same time, the volume of purchases and sales is at or approaching record levels. So far, high prices are not deterring buyers, according to brokers. According to Kerrigan Advisors, a record 167 buy-sell deals, including deals with multiple dealerships, were completed in the first half of 2022, up 16% from the first half of 2021.

In a separate report, Haig Partners, Fort Lauderdale, FL, says 225 U.S. dealerships changed hands in the first half of 2022, up about 3% from a year earlier.

The scarcity of new cars and trucks is the main driver of record new vehicle profits per unit and record dealer profits overall. Analysts attribute the scarcity to the continued shortage of computer chips and other supply chain issues, often related to the COVID-19 pandemic. At the same time, consumer demand continues to outstrip supply.

Understandably, sellers and dealership buyers disagree on whether the current environment of high demand and low supply can be sustained.

“From a seller’s perspective, this may be more sustainable than originally thought,” Kerrigan says in the webinar. That is, supply chain challenges will likely continue for “many, many years, she says, even if computer chip manufacturing capacity eventually increases.

Additionally, dealer groups and OEMs say both sides want to keep inventories low, even after supply constraints ease, as they recognize the financial benefits of lower supply compared to the request.

Finally, public dealer groups, for example, insist that they have restructured since the start of the pandemic to achieve more sales with fewer employees and less advertising. This is possible in part by moving to more online sales and marketing and a more efficient digital workflow.

Dealership buyers, on the other hand, don’t want to pay a premium for dealerships based solely on recent performance, which they deem unsustainable.

“Some buyers are concerned about going back to, in effect, pre-pandemic revenue,” Kerrigan says. Buyers are also more likely to predict that OEMs will “get weaker” and start trying to gain market share “by overproducing vehicles and pushing customers,” she says.

Kerrigan notes that publicly traded dealer groups are finding it more expensive to pay for acquisitions with stock, as stock prices are down from recent highs. Some public groups are spending heavily on share buybacks to drive up stock prices.

Additionally, she says the number of multi-roof buy-sell transactions fell to 42 in the first half of 2022 from 51 in the first half of 2021. In addition, she says public group spending on acquisitions fell in the first semester. to about $1.1 billion, from $2.1 billion a year ago.

In the short term, Kerrigan says a recession in the United States could threaten dealer profits. Longer-term threats to dealer profits include the shift to online sales, increased electric vehicle sales, the threat to market share from new manufacturers such as Tesla and Rivian, and the possibility that more brands can move to an “agency” model, where dealers simply deliver new vehicles.

So, are blue sky values ​​peaking? “I don’t have a crystal ball that can answer that question perfectly,” Kerrigan says.

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