About 10 years ago, I was sitting in the audience when the speaker boldly said that all dealers in the audience should begin selling their dealerships as soon as possible. The advent of self-driving EVs would eliminate the need for dealerships. Vehicles would be sold by the factories directly to consumers. The service business would dry up because EVs have fewer moving parts. In fact, ride-sharing services would eliminate the need for individuals to own vehicles.
The audience was filled with car dealers who, rather than run for the exits, were convinced that the facts, as laid out by the speaker, only made them more enthusiastic about the business. After all they have seen, pundits predict the death of the automobile dealership business on a regular basis. They always underestimate the value the dealership provides to the customer, and dealers’ ability to adapt to the changing needs of their customer.
Other commentators voiced similar opinions that by 2030 dealerships would go the way of Sears and K-Mart. Manufacturers drank the Kool-Aid and announced major investment in EVs and the discontinuation of certain ICE vehicles.
I was worried until I remembered that many of these pundit’s experience in retail automotive was limited to purchasing a vehicle every three years, and some did not even own a car or truck, relying on Uber, fancy car services and an occasional weekend rental. Manufacturers were chasing Tesla-like stock valuations and listening to government regulators, not the consumer.
In my mind, the only people I listen to are those willing to put their money where their mouth is. So, naturally, being from Wall Street, I looked at what the financial markets were saying. My experience in valuing car dealerships told me that the best way to judge the outlook of the industry is to look at the trend in blue-sky multiples. If car dealerships were expected to crash and burn, blue-sky multiples would decline. If dealerships were expected to continue as viable businesses, blue-sky multiples would be stable or rise.
To that end, I estimated the blue-sky multiples for the public companies. Public companies are evaluated daily by a broad group of investors who value these assets in a myriad of ways. Car dealers may have an emotional bond to the industry, but investors just want to make money. The tables below show how the market truly feels about the future of automotive retailing.
According to the chart above, the market views automotive retailing as a strong business. Average public retailer blue-sky multiples have moved up significantly from the concerns of the early Covid period and now hover at about 7x, above the valuation for the average single-point new car dealership. Further, it has been on a slightly rising trend as per dealership earnings fell post Covid. On an absolute basis, see the chart below, public company share prices have been rising.
I would note that the level of investor enthusiasm varies by the specific company. Interestingly, Lithia is selling at a significant discount to the group. This valuation has clearly frustrated management. This has been voiced in their calls with investors, and year to date they have re-purchased 2.2 million of their own shares at an average price of $313, reducing the number of shares outstanding by 5.1% in the third quarter alone. Lithia’s current share price is $314.08. But this is a topic for another day.
