Though the general economic forecasts for the North American economy have predicted weakened activity, the auto sector continues to experience record-high profits, bucking the gloomy overall trends. Pent-up demand, coupled with low inventories have created a perfect storm for car dealerships, who can avoid the costs of large inventories, and sell cars that haven’t even been made yet to consumers. Fixed ops have also been doing well as people waiting for new cars are fixing their old ones.
These were the results from Haig Partners LLC’s Q2 2022 Haig Report, which tracks “trends in auto retail and their impact on dealership values.” All of this points to high dealership values for those looking to sell. “Thanks to high current and expected future profits many dealers and investors are looking to acquire dealerships, and therefore, it is still a great time for dealers who might be looking to exit,” shared Alan Haig, President of Haig Partners.
Mergers and acquisitions activity flourished in the first half of 2022, with three per cent more dealerships sold compared to the record-setting pace of the first half of 2021. Private buying activity is up 28 per cent, while acquisitions by publicly traded retailers has fallen 62 per cent. American public companies acquired 23 stores in Q2 2022 YTD. The outlook for the rest of 2022 is promising for auto retailers. Dealers believe this period of inventory shortages and elevated earnings is likely to continue for the foreseeable future.
“That said, we are seeing some indicators that skyrocketing earnings at dealerships may have hit a plateau. The recent financial statements for the publicly traded retailers show their profits per dealership remained flat from Q1,” said Haig. “What will happen in future quarters is up for debate. It is possible that costs will continue to increase, and margins will fall, followed by lower profits. But it’s also possible that if supply of new vehicles increases, dealers may make more money since there is still so much pent-up demand that dealers will be able to maintain current margins on higher volume. Either way, our math indicates we will remain in a period of elevated earnings for the next three years or so,” he continued.
The report concludes “Auto dealerships have proven to be excellent investments in good times and bad, as evidenced by the stock prices of the public companies that have outperformed the S&P 500 Index for many years. CEOs of the public auto retailers have recently stated their intention to continue with acquisitions through the remainder of 2022.”