Welcome to the Kerrigan Advisors Market Update with Bridget Fitzpatrick and Ryan Kerrigan, founder and managing director of Kerrigan Advisors. In July we see a significant increase in number, with the Kerrigan Index up over 35% Year-to-Date compared to the S&P Index which is up almost 19%. Companies, such as Lithia and CarMax, are also posting all-time highs despite the fact that the SAAR is heading downwards. To hear more about the Kerrigan Report check out the full interview above.
VIDEO TRANSCRIPT:
Bridget F.:
Hello everyone, Bridget Fitzpatrick here and thanks so much for joining us today for the Kerrigan Advisors Market Update. Today we’re joined by Ryan Kerrigan. Ryan, thank you so much for being with us today.
Ryan Kerrigan:
Thank you Bridget. Good to see you again.
Bridget F.:
What is going on in the automotive retail marketplace?
Ryan Kerrigan:
Well, the Kerrigan index was up 4.4% in July with some really significant moves. Sonic was up 18%, AutoNation up almost 16%, Lithia up over 11%, and Asbury up over 10%. The only component stock that was down was Penske, which was down about 5%. But, it’s worth noting that Penske has very significant operations in the UK, and Brexit uncertainties are pulling that stock down.
Bridget F.:
Overall, a solid month.
Ryan Kerrigan:
Yes, a solid month. It’s worth lifting up and taking a longer view, though. The Kerrigan index is up over 37% year to date as compared to the S&P up 19%. Now, that’s an incredible increase, and both Lithia and Carmax both posted all-time highs. This is all going on at a time when SAR is edging downward.
Bridget F.:
What is causing the disconnect between car sales and these stocks?
Ryan Kerrigan:
Well, it is a complete disconnect, but some of the things we’ve been discussing for many months now are starting to play out. In this declining SAR environment, dealerships are really focused on expense control and shifting to higher-margin parts of the business model, namely F&I, used car, and fixed operations. This new emphasis is really starting to impact performance in a very positive way.
Bridget F.:
Are dealers able to grow revenue by focusing on these other parts of the business?
Ryan Kerrigan:
Yes, they are. Even as new car volume is falling, dealership revenue is up 3.9% year to date. This is driven by the used car department, which is up nearly 6%, and fixed operations up a very strong 7%. Dealers are absolutely driving revenue growth despite new car volumes being down.
Bridget F.:
How does that translate to gross margin?
Ryan Kerrigan:
Well, that’s the beauty of this. Dealers are shifting to much higher gross margin businesses. The gross margin used cars are two times that of new, and the gross margins in fixed operations are nearly nine times out of new. If you look at this profit chart, you can see this really starting to play out. New cars are now only producing 9% of dealerships’ gross profit, down by almost half from 2012. Fixed operations now represent over 50% of dealership gross profit, and F&I now represents over a quarter of gross profit. As we predicted, dealers are really getting very focused on the higher gross margin parts of the business.
Bridget F.:
How about profitability?
Ryan Kerrigan:
NADA averages have profitability of 1.4% year to date, but we frankly think that’s understated. If you look at the publics, you’re seeing much larger increases. Sonic’s earnings are up 57%, Asbury’s up 7.5%, AutoNation and group one are both up over 3%, and Lithia up 2%.
Bridget F.:
Okay, so we have SAR down, but profits and stocks up.
Ryan Kerrigan:
That’s right. I think it’s worth noting, the stock market increases are pretty darn remarkable when you think about all the discussion of technology and disruption in our industry. Remember that stock prices are supposed to reflect the best thinking of the entire marketplace about the future earnings of a given business, and the market’s saying that they think the earning stream of automotive retailers is 37% better today than it was just six or seven months ago. What the markets are saying about these disruptive technologies and how these disruptions impact profitability is, they’re just not buying it. The current consensus is that disruption is either too far out or too unlikely to impact profits, and the profit outlook remains really strong. This is very consistent with our view at Kerrigan Advisors. We continue to see evolution and not revolution as it relates to the auto retail sector.
Bridget F.:
Why are these cars doing so well?
Ryan Kerrigan:
This is a really strong part of the business right now. The average dealership’s used to new ratio has improved by 13% over 2018, and all but one of the publics are reporting really strong profitability and growth in used cars. As new car prices have have risen in recent years, these late model, high quality used cars represent strong value to consumers. Car quality is really high across the board right now, so the attractiveness of used cars has never been higher.
Ryan Kerrigan:
I’d also add that information has really improved, what we know about used cars. A lot of consumers are frankly much more comfortable buying used cars today because they can look at a really comprehensive overview of a used car’s history. I think that’s really changing the perception of used cars for a lot of consumers. In fact, on this point, Lithia CEO Bryan DeBoer said their current used to new ratio is about one to one, and he wants to radically increase this to 2.3 to one. Now, that’s a major shift in business model for a company the size of Lithia.
Bridget F.:
Any other news in recent weeks?
Ryan Kerrigan:
Well, I have to mention the surprising news out of AutoNation. They replaced their new CEO with Cheryl Miller, who had been their CFO. AutoNation just ran a very public search for the successor to Mike Jackson and named Carl Liebert just a few months ago, and even while announcing a great quarter of results, AutoNation surprise the industry recently by appointing Cheryl Miller as the new CEO. There’s been a lot of turnover in the executive suite in AutoNation, and this is just the most recent.
Bridget F.:
All right, well, thank you Ryan. It’s always great to get your perspective, and we look forward to talking with you next month. Happy to do it, Bridget. I look forward to talking to you next month.
Thank you for watching the official news source of the retail automotive industry. This has been a JBF Business Media Production.
