June numbers are officially in and the strength of used vehicles is leading to record returns on inventory. These dynamics are also affecting car dealership valuations. Joining us on today’s show, is Ryan Kerrigan, Managing Director of Kerrigan Advisors, to discuss the current state of the buy-sell market, and the takeaways from June earnings.
Kerrigan begins the conversation by discussing the underlying causes for the strength of used car sales. If you look at the Kerrigan Index for June, it was flat aside from CarMax which had a strong performance in June and was up 13% for the month. Kerrigan adds that the used car market is on fire. When you have incentives, low-interest rates, and pent-up demand, you’re making used cars more attractive.
OEM incentives for new cars are down more than 40%. The average OEM rebates were between $4,000 to $5,000 but now they are down to $2,400, says Kerrigan. The automotive retail keeps setting record after record. Kerrigan says if you look at well-placed franchises and good markets, they are seeing profitability up to two or three times over what they have been historically doing. Kerrigan believes that the normal going forward could look very different than we’ve seen in past cycles.
For the balance of the year, Kerrigan says he knows we’re going to have inventory shortages for a while, but will see strong profitability and M&A activity. Kerrigan does believe it’s a seller’s market, and he’s seeing historic highs. Buyers are seeing good franchises coming to market, strong cash flow, and good financing. Deals can only get done when buyers and dealers have some kind of overlap.
Kerrigan ends the conversation by sharing tips for success. He encourages dealers to not get sloppy and stop taking their customers for granted. The fundamentals of the business don’t go away, even if it feels easy right now.
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