Auto dealers can expect some degree of the industry's improved financial position to continue, Kerrigan Advisors Managing Director Erin Kerrigan said Tuesday.
The average dealership earned $4.1 million worth of pretax profit in 2021, according to National Automobile Dealers Association data she presented during an American Financial Services Association Vehicle Finance Conference & Expo session.
The event preceded the NADA Show in Las Vegas.
The average represented a "jaw-dropping" 185 percent increase from the $1.4 million average annual earnings between 2015 and 2019, according to Kerrigan.
"Simply put, it is a really good time to be a car dealer," said Kerrigan, whose company provides dealership mergers and acquisitions services and consulting.
Front-end gross profit — excluding finance and insurance revenue — rose to $2,483 on the average new vehicle in 2021, up more than $1,000, according to NADA data Kerrigan shared. The average used-vehicle front-end profit rose more than $900 to $2,524.
The average dealership net profit margin was 5.8 percent, according to NADA figures.
Dealerships are seeing the economic benefits of less inventory, and many do not plan to return to a lower-margin model, Kerrigan said. Even if a margin in the 5 to 6 percent range might be difficult to sustain, dealerships wouldn't return to the 2.5 percent spreads experienced before the COVID-19 pandemic, she said.
"Today's business model is just simply a better one," Kerrigan said.
Kerrigan said dealership buyers expect some of the industry's structural efficiency and higher grosses to remain "even after supply meets demand."
Dealership blue-sky valuations — the value of a dealership beyond its physical assets — are now based on expectations of future profits, "which is a change," she said.
Historically, buyers based their estimates on how a dealership performed in the past.
Some buyers wish to calculate blue-sky values the old way and use pre-pandemic averages, Kerrigan said.
"Most sellers are looking at them and saying, 'You're crazy. I'm making $4 million, and you want me to sell my franchise for $6 million?' " she said.
Dealers considering a sale feel no sense of urgency to do so, according to Kerrigan.
The business is producing an "unbelievable return" not available through other investments, Kerrigan said, showing a graphic of how the average dealership return on equity beat the Standard & Poor's 500.
Kerrigan called general industry mergers and acquisitions activity a sign of the industry's financial strength.
Kerrigan said that 384 deals representing more than 600 franchises took place in 2021 — a 32 percent increase in transactions from 2020 and 150 more deals than any pre-pandemic year.
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