Kerrigan Report: March Sees Top Luxury Franchises Increasing Their Market Share

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Welcome to the Kerrigan Advisors Market Update with Bridget Fitzpatrick and Ryan Kerrigan, managing director for Kerrigan Advisors.

VIDEO TRANSCRIPT: 

Bridget Fitzpatrick: Tell us about the Kerrigan Index’s performance in March.

Ryan Kerrigan: The Kerrigan Index was up a significant 6% for the month, while the S&P was only up 1.8%, so a very significant overperformance for the index.

Bridget Fitzpatrick: Who were the biggest winners and losers?

Ryan Kerrigan: Well, four of the component stocks were up, Group 1, Lithia and AutoNation. But the story here was really on CarMax, which was up over 12% and really carried the index higher. Asbury, Penske and Sonic posted losses this past month.

Bridget Fitzpatrick: What is driving CarMax higher?

Ryan Kerrigan: Well, as I mentioned, CarMax is up over 12%. The company reported fourth quarter and full year earnings last month, and posted increases across the board. Revenue was up 6%, net income rose 58%, same-store sales up 2.8%, so a really outstanding quarter for CarMax.

Bridget Fitzpatrick: Got it. Anything else notable on their earnings call?

Ryan Kerrigan: Yeah, there was. They talked at length about their omni-channel sales experience, which is currently being piloted in three markets. Now, omni-channel approach provides a seamless buyer experience for consumers, as they move from the computer to mobile to the showroom. The model offers online pricing estimates and appraisals for customers, vehicle home deliveries and expedited pickups at stores. Bill Nash, the CEO of CarMax, believes this strategy could take significant cost out of the current model and the market liked what they heard.

Bridget Fitzpatrick: How are auto sales last month?

Ryan Kerrigan: Well, US light vehicle sales were down 3.1%, so not a great month. That said, SAAR was much stronger than anticipated. The run rate was 17.4 million, which is stronger than many recent months, and much better than prediction. So, overall, a mixed bag for US auto retail.

Bridget Fitzpatrick: Your 2018 year-end review Blue Sky report was published last month. What were some of your findings?

Ryan Kerrigan: Well, one thing that we’re really observing is buyers becoming pickier. As SAAR and the economic cycle shows signs of slowing, many buyers are growing more cautious, and they’re willing just to underwrite deals. This is a classic flight-to-quality phenomenon that’s common in late-market cycles, and we’re really starting to see that play out in auto retail.

Bridget Fitzpatrick: So, deals are getting harder to get done?

Ryan Kerrigan: Yes. I’d observed there are two types of situations that are becoming more difficult to transact. The first is underperforming dealerships. In a plateauing environment, buyers are less confident in their ability to improve performance if facing industry headwinds. So, while there remain a lot of under-managed dealerships out there, buyers are wary that they could improve profits at this point in the economic cycle, so these stories are very much harder to get done.

Bridget Fitzpatrick: What’s the second example?

Ryan Kerrigan: Well, buyers are really shying away from franchise that rely heavily upon stair-step programs. These franchises show much more earnings volatility given the complexity associated with these programs, and it’s harder to play a volume game in a slowing marketplace. While some of these franchises can be quite profitable, buyers are much more reluctant to step into these franchises today.

Bridget Fitzpatrick: So, what are buyers looking for?

Ryan Kerrigan: Well, that’s the right question. Buyers now seek strong franchise with good business models, frankly, the kinds of businesses that can ride through the economic cycle. So, they’re looking for high sales average per dealership, strong fixed operations, well-funded captive finance companies, and really good dealer relations. We expect top-volume franchises, such as Toyota, Honda and Subaru, to experience continued growth in the buy-sell market share in 2019.

Bridget Fitzpatrick: How do the top luxury franchises fit into the buyer’s preferences today?

Ryan Kerrigan: Well, we’d also expect the top luxury franchise to grow market share as well. That said, as interest rates rise, the higher multiples can be challenging for buyers to justify in a plateauing market. But for buyers with a longer-term buy-and-hold-type strategy, these remain very attractive assets even in today’s strong evaluations.

Bridget Fitzpatrick: Any other market dynamics to discuss?

Ryan Kerrigan: Well, we’ve got Q1 earnings coming up later this month for the rest of the public. There’s a really good window in how revenue and margins are holding up in 2019, so we have a lot to talk about next month.

Bridget Fitzpatrick: Okay, so stay tuned.

Ryan Kerrigan: Yes. Lots of uncertainty in today’s marketplace. I think dealers are treading carefully and, frankly, working harder to make good decisions. There’s some great opportunities coming to market, and dealers are weighing the timing of acting on these unique opportunities while knowing that we see clear signs of slowing. So, exciting times for those of us in auto retail.

Bridget Fitzpatrick: All right. Thanks so much for joining us today, Ryan. We’ll see you back here next month.

Ryan Kerrigan: Thank you, Bridget. Always good to be with you.

Thank you for watching the official news source of the retail automotive industry. This has been a JBF Business Media production.

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