Bridget Fitzpatrick welcomes Ryan Kerrigan, Managing Director of Kerrigan Advisors, to the studio to discuss the Kerrigan Market Update, how June ended on a high note and the growth within the automotive industry.
Bridget: All right, so let’s start with the Kerrigan Auto Retail Index for June. How did the index do?
Ryan: The Kerrigan Index was up 1.5% for the month of June, slightly outperforming the S&P 500, which was up one half of one percent. Two of the seven component stocks were up for the month of June with Auto Nation up 6.4% and CarMax almost 5%. The other five stocks were down, with group one down the most at 10.3%.
Bridget: So, a mixed month?
Ryan: Yes. Mixed, but generally a very solid month for the industry. Car sales rose 5% in June, beating estimates of 2-3% Well, that did reflect one additional selling day and an additional weekend in June. It was a very strong showing for our industry. Through six months sales were up 1.8% year over year.
Bridget: But revenue is up, right?
Ryan: Yes. Good point. Revenue continues to climb as transaction prices continue to rise. Average ticket price is up over $800 in the first six months of 2018 versus 2017, which represents an almost 3% increase. So, that’s where we’re getting the growth.
Bridget: But there are headwinds?
Ryan: Yes. There sure are. The biggest headwind that we see is the incredible uncertainty caused by proposed automotive tariffs. This is a level of macroeconomic uncertainty that we have not seen in our industry for quite some time.
Bridget: In a trade war, are there winners and losers?
Ryan: Probably not. Probably not winners that is. While the intent of the administration is to try to level the playing field and get some other countries to drop tariffs on American cars, the overall uncertainty to the industry probably outweighs these potential gains. The fact of the matter is that American built production is really targeting the unique demands of our marketplace. We buy frankly just much larger more expensive and less fuel efficient cars than most of the rest of the world. So the incremental upside for American cars is probably pretty limited, and that’s why you’re seeing the full spectrum of players in our industry coming out against tariffs and the proposed trade war, including the Detroit Three.
Bridget: Who has the most to lose?
Ryan: As things stand now, the bullseye is really on the German manufacturers who have carved out a very lucrative segment of the American market. They’re working very hard to try to find some kind of resolution that will satisfy the administration. AIADA, which is the trade organization that represents American dealers selling non-American brands, is in overdrive trying to influence policy in Washington, DC. For those interested in this topic, I would suggest checking out their website.
Bridget: All right. Let’s shift gears. I see that CarMax released earnings in June.
Ryan: Yes, we did have one earnings announcement in June, and CarMax reported very strong numbers. Earnings were up 12.7% due primarily to lower corporate taxes. This pushed the stock up about 5% in the month of June.
Bridget: Any change in incentive spend on the part of the manufacturers?
Ryan: Incentive spend continues to be very high through the first six months of the year. Average spend was approximately $3,900 which represents a 3% year over year increase. Today’s current level of sales continues to be strongly subsidized by these OEM incentives.
On a positive note though, we are seeing fleet sales down just a bit. Fleet sales in June were down 4% years over year, which is always positive indicator for strength in our industry.
Bridget: Moving in to the buy/sell market. What are you seeing?
Ryan: We continue to see a robust market, but increasingly a more selective one. There remains very strong demand for good franchises in good markets as acquires remain convinced that the future of auto retail lies in size and consolidation.
We’re finding a good equilibrium as it relates to valuation. Multiples remain strong, but buyers and sellers are often able to agree on the underlying earnings in today’s market. Coming off a record setting 2015, we’ve seen profits pull back in 2016 and 2017 for many dealers. Some were off by just a few percent, some were off considerably more, but the earnings feel more sustainable to many buyers and buyers are more comfortable underwriting deals at current levels of profitability versus 2014 and 15 when profits were unusually high.
Bridget: Now when you say “good franchises” and “good markets”, can you elaborate?
Ryan: Sure. This is not a one size fits all definition; however, I generally characterize the market share leading luxury brands and the market share leading volume brands as currently being most in demand. Local market conditions that allow for reasonable front end gross are particularly attractive. We often see this in higher income growing suburbs and midsize towns. With flat industry unit volume, buyers are less willing to believe that challenger brands or that underperforming dealerships will be easy targets to turn around.
Related to that point, buyers are less willing to pay for pro forma earnings than they were in the past.
Bridget: Now, as you know, at CBT News we talk a lot about operations and how to do them better. Do good operations matter?
Ryan: Absolutely. In a stable marketplace we really see operational excellence shine through. While much of our industry continues to operate in a 1-2% net to sales, we see particularly strong operators generating profitability way beyond those thresholds.
This is true across the board ranging from Toyota and Subaru stores, well positioned luxury stores, and even domestic stores. In a flat market the best operators really stand out.
Bridget: Any recent transactions that you can announce?
Ryan: Yes. We are pleased to represent the [Landfear 00:05:43] organization in the sale of their Toyota and Subaru stores in Wilsonville, a suburb of Portland, Oregon. Wilsonville Toyota was the second largest Toyota dealership in the Pacific Northwest by new unit sales. Wilson Subaru was a new store opened in December of 2016 and closed out 2017 as the 19th largest Subaru dealership in the nation.
Ryan: Thank you, and continuing conversations from past shows, this represents yet another Canadian buyer coming into the U.S. market for the first time.
Bridget: And more to come?
Ryan: Yes. We are quite active in virtually all regions of the country right now. We’re relatively close to announcing a Southern California transaction, and we’re in the marketplace with transactions in the Northeast, the Southeast, the Upper Midwest, and the Pacific Northwest, so we remain very, very active.
Bridget: Well, thank you Ryan. We always appreciate any chance we can to connect with you on the buy/sell market. Thanks so much for joining us on CBT Automotive News.