Digital Dealer - May 2018 - 15

Penske
Group	1
AutoNation
Lithia
Sonic
Asbury

"Tax benefits for us
should be, generally
speaking, better or greater than the tax benefits
for the smaller private
operators."
- Sean Goodman,
CFO, Asbury Automotive. (2017 Fourth
Quarter Earnings Call)
"This change in our tax
rate lowers the hurdle
rate we apply to our
acquisitions, resulting in
more deals meeting our
disciplined annual return
on equity target of 15%
to 20%."
- Bryan DeBoer,
CEO, Lithia Motors.
(2017 Fourth Quarter
Earnings Call)
DEALERS'
INVESTMENT
STRATEGIES SHAPED
BY AUTO RETAIL'S
EXPECTED EVOLUTION

There is no doubt
the way in which new
vehicles are sold and the
kinds of vehicles sold will
change dramatically in
the future. While these
changes will have implications for the auto retail
business model as we
know it, the timing of the
transformation is still very
much an unknown. As
such, these factors are
not currently being priced
into today's franchise values because the market
is unclear how they will
affect future profits.
This being said, some
of the largest dealership
groups in the industry are
adjusting their investment
strategies in anticipation

Tax	Savings	($	in	mm)
$243
$73
$41
$33
$28
$8

CHART 1

Public Company
Savings
Tax Savings
($ in mm)in Millions
from Tax Reforms
2017

$243

$73

Penske

Group 1

$41

$33

$28

AutoNation

Lithia

Sonic

$8
Asbury

The publics announced $426.5 million of tax savings in the
fourth quarter as result of the tax reform. With reduced tax
rates, public dealers will have more capital for acquisitions
in 2018 and will be better able to meet their after-tax ROI
requirements, likely resulting in more public transactions.
Source: SEC Filings for Asbury, AutoNation, Group 1, Lithia, Penske, Sonic

of change. For instance,
private dealership groups,
such as Holman Automotive and Flow Automotive,
are actively investing in
fleet management operations, anticipating shifts
in consumer car ownership. Likewise, three of
six publics are allocating
some of their investment
capital to diversify their
business model away
from new vehicle sales.
These companies expect
their diversification strategies will better position
them for any potential disruption to the current auto
retail business model and
provide opportunities to
capitalize on a changing
environment.
(See Chart 2)

As the evolution of auto
retail unfolds, Kerrigan
Advisors expects growing
dealership groups to
continuously reassess
their capital allocations.
This reassessment may
have positive or negative
effects on future franchise
values, depending on
which way our industry
evolves. One thing is for
sure: when the unknown
becomes known, industry
changes will be priced
into the buy/sell market.
Until that time, most
industry participants
are studiously examining when, how, where
and why auto retail will
change.
DEALERSHIP PROFIT
VARIABILITY WIDENS

BLUE SKY PRICING
RANGES

After 2009, the vast
majority of dealerships
experienced sales and
earnings growth. The
rising tide lifted all boats.
Today is a different story.
Dealership profit variability has increased significantly with some dealers
experiencing more earnings volatility over the last
three years.
First and foremost,
plateauing industry sales
has resulted in a more
competitive marketplace, creating winners
and losers as industry
participants go after a
finite pool of consumers.
While some dealers are

D I G I TA L D E A L E R . C O M

Continued on pg. 16
M AY 2 0 1 8

15
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Table of Contents for the Digital Edition of Digital Dealer - May 2018
