Digital Dealer - May 2018 - 16

O WN E R S H I P

Continued from pg. 15

CHART 2

Public Company

Investment Strategies in the Face of a
Changing Retail Environment

Comments from Recent Earnings Calls

AutoNation

Vertically integrating AutoNation's business
model by selling private label parts, investing in collision centers, opening branded
used car centers and acquiring auto
auctions, as well as launching a strategic
partnership with Waymo.

"I've made a bet on Waymo. How fast
autonomous sharing grows, I can't
predict, but I'll be there however fast it
goes." - Mike Jackson, Chairman & CEO

Penske

Investing in used car platforms, commercial
truck businesses, FAIR, and international
auto retail.

"We continue to build a different model
that is about diversification."
- Roger Penske, Chairman and CEO

Investing in EchoPark (Sonic's branded
used car operation) and considering acquiring used car dealerships, while limiting real
estate investments in new vehicle bricks
and mortar facilities.

"One of the reasons why I like the preowned market so much is, one, it's a much
larger market than the new car business.
And we don't have barriers to entry."
- Bryan Scott Smith, President & CEO

Sonic
successful at reducing
expenses at a commensurate pace as sales
decline, others struggle
to adjust their operations.
This results in a greater
divergence in dealership
profitability from franchise
to franchise. Thus, even
Earnings Change	(2016-2017)
though blue sky multiples
are not expected to adjust
dramatically in the near
term, dealership profits
upon which they are
applied will vary considerably from transaction
to transaction, resulting
in meaningful swings in
franchise value even for
the same franchise within
the same market.
Dealership earnings
were highly variable in
2017. In 2018, Kerrigan
Advisors expects dealership earnings volatility
will result in significant
differences in transaction
pricing from deal to deal.
(See Chart 3)
We also expect earnings variability to have
16

M AY 2 0 1 8

CHART 3

Change in Average Dealership Profits
by Type of Dealership
2016 vs. 2017

-5%
-7%

-7%

-11%

Luxury
Dealerships

Import
Dealerships

Mass Market
Dealerships

Domestic
Dealerships

Source: NADA and Kerrigan Advisors Analysis

a meaningful impact on
valuation in 2018, particularly as an increasing
percentage of dealership
earnings come from OEM
incentives (see Chart 3).
When OEM incentives
represent a larger portion
of dealership profits,

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

dealerships can have
massive earnings swings
from quarter to quarter,
particularly when the
OEM changes incentive
goals and/or a dealership
misses its targets. (See
Chart 4)
Another issue which

will vary dealership profitability in 2018 is rising interest rates. The Federal
Open Market Committee
reported that it "expects
economic conditions will
evolve in a manner that
will warrant further graduContinued on pg. 18
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