Lithia Motors get $200 Million line of credit for expansion

[XDCX]

While Lithia's stock (LAD) is known to be a bit volatile, yesterday was a good day and the stock closed up over 10% on the day - making it one of the top 10 gainers on the NYSE.

So what fueled Lithia's surge in stock price? The only recent news was an announcement that Lithia has secured a $200 Million line of credit which will allow them to purchase more dealerships if they elect to do so. Here's a link to the news report - click here

According to the report, Lithia has accounted for 13% of all dealer buy/sells for the public dealer groups made during the first seven months of this year.

And while I know that Moshe from Performance Brokerage Services doesn't like to use a multiple of earnings as a gauge for Blue Sky, I thought it was interesting that the article suggested the current Blue Sky multiple for a BMW store is six to eight times pre-tax earnings and the multiple for a Mercedes store is slightly less at six to 7.5 times pre-tax earnings.

[XDCX]

Originally Posted by XDCX

And while I know that Moshe from Performance Brokerage Services doesn't like to use a multiple of earnings as a gauge for Blue Sky, I thought it was interesting that the article suggested the current Blue Sky multiple for a BMW store is six to eight times pre-tax earnings and the multiple for a Mercedes store is slightly less at six to 7.5 times pre-tax earnings.

I wonder what the multiple is for a single point Fiat store?

[steve_biegler]

Originally Posted by XDCX

I wonder what the multiple is for a single point Fiat store?

HEHEHEHEHEHE

[SHACOS]

Looks like Lithia is purchasing another Fresno point, this time a Subaru dealership. Yes, I still have my sources.

13% of all buy/sells? That seems a bit high!

[XDCX]

Originally Posted by SHACOS

Looks like Lithia is purchasing another Fresno point, this time a Subaru dealership. Yes, I still have my sources.

I'm impressed - you're still tied in to the Lithia's secret network.

Originally Posted by SHACOS

13% of all buy/sells? That seems a bit high!

I thought the same thing but I'd be willing to bet the number of buy/sells done by the public groups is really small so far this year. If Lithia did one out of the eight total deals that would be 13%.....

[Moshe @ Performance Brokerage Services]

Originally Posted by XDCX

And while I know that Moshe from Performance Brokerage Services doesn't like to use a multiple of earnings as a gauge for Blue Sky, I thought it was interesting that the article suggested the current Blue Sky multiple for a BMW store is six to eight times pre-tax earnings and the multiple for a Mercedes store is slightly less at six to 7.5 times pre-tax earnings.

Scott, I don’t oppose a multiple of earnings as a guide. I do however oppose the way it is being used loosely by brokers and dealers as if it was only gauge to value. There are so many variable besides earnings. If only to mention one - with manufacturers’ demands for new facilities being front and center, a multiple of earnings statement should include at the minimum some reference to the real estate situation currently at the dealership. i.e. occupancy cost, owned or leased property, is an additional investment necessary in new facilities, etc. Buyers have wised up in recent years - if an investment in facilities is required at day one, they look for a reduction in the goodwill price.

I believe that I mentioned it before in another thread, but I will repeat some of it here since it is very relevant. In June 1995 NADA publication referred to the multiple of earnings as a “greater fool theory”, and later on in a 2004 publication, it further stated that it is “rarely based upon sound economics or valuation theory”.

To that I add: until we have a sustained stabilization in the auto industry, it should not be used at all. In light of the volatility the industry has experienced since 2008, and the extreme fluctuations in sales and profits of dealerships in the last 3 years, what should we use to multiply? Earnings of the last 12 months? A 3-year average? A 5-year average perhaps? Each of course will produce a radically different number.

And by the way, what number will we multiply by if a dealership is losing money? It still has a goodwill value, does it not? After all, it is a franchise business with territorial protection and as such, it has an intangible value!

Let’s take it a bit further. Does a Chevrolet dealership netting a $1M in Nebraska has the same (multiple) value as one in San Diego netting the same? And if both were in the same area netting the same yet one was netting $1M, down from $2M a year before, and the other was netting the same except that a year before it netted $500K, is the value still the same based on a multiple of earning…?

Just to mention a few variables: what about the growth potential, sales effectiveness, absorption rate, competition, demographics, geography, occupancy rate, image compliant or not, market size, metro or fringe, units in circulation, etc. The list goes on to over 50 factors that we take into consideration when we conduct a dealership valuation. Last but not least – what about the unique buyer, isn’t he always willing to pay more?

The correct approach to a multiples of earnings when we peel it off comes down to the desired ROI by the buyer. Therefore, value is established not based on seller’s performance but rather as a multiple of buyer’s pro-forma!

Three examples from the trenches just to emphasize my point:

• We brokered the sale of a Toyota dealership netting $970K. It sold for the asking price of $6.4M for its goodwill portion. Many prospects said that it was priced too high at 6.6 times earnings. The one who purchased it paid the full asking price. He netted $3.3 million in his first year of ownership. So what was the multiple of earning that he really paid…?
• We brokered the sale of a Nissan dealership selling 17 units per month and netting $300K per year. The price was $3M for the goodwill which represented 10 times earnings.
• A seller recently rejected a $4M goodwill offer on Hyundai dealership selling 30 cars per month. That offer also represented 10 times of his earnings.

Wouldn’t it be irresponsible to state therefore that in our recent experience the value of Nissan and Hyundai dealerships is 10 times earnings or more?

One size does not fit all. Dealerships are as unique and complex as the dealers who own and run them. No one valuation method or a set of rules of thumb can determine their value. There isn't enough data/activity to come to such definitive conclusion mentioned in the thread. I have a client who is willing to pay 10 times earnings for a Mercedes store if it is of a particular size, in a particular size market, if the facility is less than 5 years old and if the rent represents less than 12% of the gross profit. Doesn't it throw off the formulas a bit?

Buyers unfortunately don’t consider the asking price as the actual purchase price. Quite often it does not even remotely epitomize what the dealerships are truly worth. Naturally, a buyer’s valuation is usually quite different from what the seller believes his dealership is worth. Sellers are typically emotionally devoted to their dealerships and naturally would like to factor their years of hard work into the value calculation. Unfortunately, this has nothing to do with the value of the dealership.

For some more in depth comments about our view regarding dealership valuations: http://performancebrokerageservices.com/valuations/

[XDCX]

Moshe - Great comments - thanks for sharing your experience.

I agree 100% that the multiple of earnings approach to calculating Blue Sky is too simplistic for evaluating the true value of a dealership but it gets a lot of attention by brokers, dealers and the media.

I also thought it was interesting that your clients factor the OEM's facility demands into their evaluation and will offer less money to a dealer who's trying to sell a store with a non-conforming facility than another dealer who's selling a store with a conforming facility. As you point out this variable would be missed if a dealer simply relied on a multiple of earnings Blue Sky calculation. (It also points out that your clients know that investing $500K in a facility to make the OEM happy doesn't necessarily add $500K to the value of the store when he/she decides to sell it.)

[XDCX]

Originally Posted by Moshe @ Performance Brokerage Services

Three examples from the trenches just to emphasize my point:

• We brokered the sale of a Toyota dealership netting $970K. It sold for the asking price of $6.4M for its goodwill portion. Many prospects said that it was priced too high at 6.6 times earnings. The one who purchased it paid the full asking price. He netted $3.3 million in his first year of ownership. So what was the multiple of earning that he really paid…?
• We brokered the sale of a Nissan dealership selling 17 units per month and netting $300K per year. The price was $3M for the goodwill which represented 10 times earnings.
• A seller recently rejected a $4M goodwill offer on Hyundai dealership selling 30 cars per month. That offer also represented 10 times of his earnings.

Those are great examples.

I like the example where your client was able to increase the net profit of his/her Toyota dealership to $3.3 Million from the $970K achieved by the previous dealer. Clearly he/she saw the dealership's potential and looked beyond a simple Blue Sky calculation.

I'm also somewhat amazed that one of your clients passed on a $4 Million Blue Sky offer for a Hyundai deal. I guess that's a good indication of how the market's valuing Hyundai's prospects for the future.