I'm analyzing auto dealerships and am not sure exactly how to think about them in terms of comparability / valuations due to the floor plan financing aspect of dealerships.
For those who don't know, floor plan financing is basically like a revolver where the dealer buys cars from the manufacturer. The cars are used as collateral. All dealerships have two types: trade and non-trade.
In terms of calculating EV, would you add in the additional floor plan debt? What would be the rationale for either way?
I would assume that the best way to look at them is to include the floor plan debt in EV, but the ER analysts (from Credit Suisse and others) exclude the floor plan debt in their calculations.
Any input would be appreciated.
Have you added a blue sky valuation into your overall valuation model?
No. My ignorance will probably start to show. What do you mean by that? Is that sort of the NAV + the operating part of the business (the ops being the Blue sky)?
Any suggestions on that?
Yeah, you take EBT multiplied by a blue sky multiple to arrive at goodwill value and add it to your net tangible assets. Common valuation method for auto dealers.
Determining what multiple to use is based on experience and industry trends, similarly to how EBITDA multiples are arrived at to value businesses. I don't have any experience in the space so I couldn't help you with how to figure out what multiples to use.
Also, and here's something I could be 100% wrong on, but I believe floor plan financing is treated as goodwill so it isn't included in the debt when calculating EV per the usual methods.
Thanks!
Floor plan financing is not treated as debt, it wouldn't make sense to treat it that way.
Khayembii is correct, typical dealership valuation is blue sky multiple plus tangible net worth.
Just off the top of my head, current blue sky multiples for various franchises look something like this:
Super luxury (Bentley, RR, McLaren, etc): 3 Budget class (Honda, Toyota, American): 4-5 Lower luxury (Infiniti, Volvo): 6 Luxury (Mercedes, Porsche, Lexus, Jaguar): 7
Thanks for update.
That's interesting that the Super luxury brand sports a lower valuation. Is it just a function of demand? profitability of those dealerships?
Do you have a source for any of this data on the EBT multiples? I'm working on a rollup for budget class dealerships and am just beginning to wrap my head around the EBT Blue Sky Multiple + Tangible Net Worth valuation... Will likely couple this with a standard DCF for sanity check.
This article from August in Autonews covers a Presidio report, and the multiples are consistent with what I listed above:
wwwDotautonewsDotcom/article/20130826/OEM/308269956/report:-blue-sky-multiples-reflect-brands-fortunes
The more luxury the franchise, typically the higher the margins and the more brand loyalty, and therefore lower risk.
But the super luxury franchises have little brand loyalty and are very volatile. Some people will habitually buy a Mercedes/Lexus every 2 years, but few have that same attachment to a franchise like Bentley.
Super luxuries do well when they come out with a new vehicle that creates awe, it becomes what every rich guy wants to own. But then another franchise comes out with something shinier, and the rich guy has no attachment to the old brand. Mercedes/Lexus has lasting loyalty. A lot of this also has to do with the super luxuries only coming out with a new vehicle model every couple of years.
Super luxury franchises seem to be owned by people with money to burn who just like to say they own an X luxury car dealership. This can be said for many car dealerships really, but is especially true for the super luxuries.
Very helpful, thanks.
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