4 Articles - Investor Appetite for Retail Automotive
Article one from our Linkedin Series "A Disrupted Future in Retail Automotive"
Retail automotive is in a period of uncertainty that is arguably unlike any before in its history. Sure, we're coming out of a Covid-impacted 18-months and the microchip crisis will be with us for many more months to come, but the longer-term issues run much deeper than that.
Manufacturers' exploration of "omni-channel" marketing, the introduction of connected, autonomous, sharing and electric technologies ("CASE") and the development of alternative "as-a-service" models ("MaaS") all challenge the traditional wholesale/retail model. Dedicated superstores and newer "virtual" platforms are revolutionising customer experience. For an industry historically burdened with razor-thin margins, these issues are a catalyst for creating a more efficient and dare I say, "fun" distribution channel.
Investors are watching. While retail automotive doesn't typically create a great deal of excitement, models that directly address uncertainty with a cogent response are being rewarded in the marketplace. Now, more than ever before, corporate boards and their management teams must develop and communicate well-developed strategies for addressing retail automotive chaos.
UK Franchised Dealers
That investors don't seem particularly interested in the UK's franchised dealers may be something of an understatement. In line with their low profitability, poor return on assets and high risk (remember the "period of uncertainty unlike any other"), investors value these companies at roughly half of that market touchstone EV/EBITDA of around 15x.
Furthermore, rather apathetic valuations include a robust recovery from the initial Covid scare. With the exception of Motorpoint, all of the franchised dealer groups are trading at 120% to 150% of where they were 18 months ago. Even Lookers, recently cleared of regulatory scrutiny, has jumped right back to share price growth alongside its peers.
One model that has captured investor imagination is the used car superstore Motorpoint. Selling nearly-new and late-plate used cars at scale with a minimal asset base and keen attention to customer experience, Motorpoint trades at about double the revenue and EBITDA multiples of their franchised neighbours.
Franchised dealers haven't failed to notice Motorpoint's strong trading performance and even stronger valuations as many are acquiring or developing their own superstore models.
US Franchised Dealers
Publicly-traded dealers in the US fare marginally better. Penske and Lithia in particular are executing on growth/efficiency strategies that have found favour with investors (including their Sytner acquisition here in the UK, Penske is now Europe's second largest dealer network).
Even more so than in the UK, share price of dealers in the US have spectacularly recovered from the initial Covid shutdowns with both Lithia and Autonation trading around 2.5x where they were 18 months ago.
Like with Motorpoint in the UK, it is superstore model Carmax that has captured investor imagination. Here again, valuation multiples for Carmax are double or even triple those of their franchised neighbours.
Virtual Used Car Platforms
Here in the UK, closely-held virtual platforms Cinch and Cazoo have captured headlines with prospective valuations at about £5 billion each after only a year or so in business. These 'newcos lead a pack of start-ups including Carzam, Auto1 Group's Autohero and Aures Holdings' Driverama. All of this virtual "mania" comes on the heels of Carvana in the US. first mover and by far the largest virtual platform,
None of either the publicly-traded or closely held enterprises has yet to earn profit. Nonetheless, investors prize these eCommerce-targeted models for their compelling response to an uncertain retail automotive sector. In fact, discussion of valuation multiples for these largely early-stage businesses may not be terribly meaningful as investors are really looking to capitalise on trading performance not expected for the next several years. In executing against its growth strategy, Carvana is largely maintaining its valuation multiples
Retail automotive has not traditionally been a terribly attractive investment. It's a tough business with low margins and a fair amount of inventory and real estate risk.
However, for those business models that directly address the uncertainty of new marketing models, new vehicle technologies and new mobility access models, investors take notice:
Used car superstores in both the US and UK double and even triple the trading multiples of their franchised neighbours.
Virtual platforms both in North America and Europe have attracted at least $50 billion of value with none yet having earned a penny of profit.
Corporate boards that promote a cogent response to the new retail automotive paradigm will continue to garner attractive valuations. Those who don't will face increasing capital pressure.