75% of the dealers questioned by the latest Kerrigan Dealer Survey anticipate that dealership earnings will remain at their present high levels or reach new highs in 2023. Today on CBT Now, Ryan Kerrigan, Managing Director of Kerrigan Advisors, joins us to update us on mergers and acquisitions in the automotive industry today.
For starters, record profits continue to rise. According to Kerrigan, the publics reported yet another set of record earnings through the first three months of 2022. A record profit of $4.7 billion, up 26% from 2021, was also achieved. To put things in perspective, that’s exactly three times as much money as the publics made in 2019 before the pandemic. Kerrigan claims, “we observe this on the private side as well.”
Stocks are down for the year. The Kerrigan Index™ significantly declined in 2022 by 33%, underperforming the larger markets. However, multiples are now very compressed. The publics are trading between a two and four-times blue sky multiple, which is very low, according to Kerrigan Advisors. On the other hand, the S&P is currently trading at 28 times earnings. While this isn’t exactly a side-by-side comparison, it does give you an idea of how cheap auto retail companies are.
Therefore, stock buybacks are the best course of action when publics stock is shifting funds. For example, through the first 9 months of 2022, they spent $3.2 billion on buying their own stock, for a total of $5.5 billion over the previous seven quarters. Since over 15% of the stock in these companies has been retired, Kerrigan notes, “this is incredibly profitable.”
With just approximately 50 franchises purchased by the publics in 2022 compared to 238 in 2021, transaction activity has drastically decreased. To give you an idea, the publics spent $9.6 billion, or about $10 billion, in 2021; the amount they will spend in 2022 will be considerably less. Resulting in the publics becoming very selective.
The good news is that industrial change probably indicates that the industry is returning to traditional principles. Disruption-related commotion is no longer as loud. Dealer lots are starting to be replenished with mainly ICE vehicles as EVs continue to be difficult to sell. As a result, advertising, marketing, and sales teams need to be prepared to start selling cars, much like prior to the pandemic. Kerrigan says, “Dealers, in my opinion, are in a much better position when it comes to touchless transactions, making it much easier to meet customer needs.”
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