Erin Kerrigan, Managing Director of Kerrigan Advisors, joins CBT News to discuss October’s Kerrigan Index and the marketplace’s reaction.
The Kerrigan Index™ is composed of the seven publicly traded auto retail companies with operations focused on the US market, including CarMax, AutoNation, Penske Automotive Group, Lithia Motors, Group 1 Automotive, Asbury Automotive Group, Sonic Automotive.
For the month, not surprisingly, the Kerrigan Index was down 7.74 percent which was in line with the S&P 500 which was also down by 6.94 percent. We all know that the stock market has been pretty volatile over the last month or so, but interestingly enough, Lithia Motors was up 7.13 percent breaking from this downward trend. It was the only stock that was up in the index for the month, and according to Kerrigan Advisors, that is an indication of investors’ support of Lithia’s strategy and their investment in Shift. Lithia talks about using that investment to support their entire dealer network.
In the third quarter, we continued to see a very active market. 2018 will also mark the fifth consecutive year of over 200 transactions. In the last 5 years, we’ve seen over 1,000 transactions in our market, which ends up being an eighth of the dealer body that has changed hands.
Kerrigan Advisors have also done a lot of analysis of the generational shifts in the industry, especially in the selling market. Dealers like to think in generations, but some families are deciding not to pass their business down because it’ll be difficult in the coming decades with potential changes in the industry. Only about 30 percent of businesses make it to the second generation, 12 percent make it to the third, and only 3 percent make it to the fourth.
Kerrigan found that sellers are coming to the market because there are a lot of buyers, and the increase in buyers is due to the coming change. Buyers are excited about the idea of consolidating this industry. The retail industry is currently one of the most fragmented industries, but it represents astronomical amounts of money. Buyers are looking to ride the wave of innovation and to grow through consolidation.
Are buyers accessing outside capital? Yes, we have seen them look to equity markets and families offices as well as private equity firms to grow their groups. Debt markets as well are becoming popular sources of funding. The Ken Graff Automotive Group went to the bond markets to raise funds to buy out their equity partner. It was a very unique transaction and shows that the investment community is willing to work with auto retailers in the consolidation strategy.
As interest rates rise, typically buyers and investors have higher costs of capital; the cost of borrowing money goes up and the amount they’re willing to pay for a dealership’s earnings often goes down. Keep in mind, it takes time for rising interest rates to affect valuations, but we do expect valuations to change in the future if interest rates continue to rise.