In each “Meet the Team” segment, we highlight a different professional on our Auto Dealer Industry team. This week we highlight David Harkins, Senior Financial Analyst.

David Harkins, CFA, ABV began his valuation career at Mercer Capital as an intern in the summer of 2016. After finishing his degree at Sewanee in 2017, David joined Mercer Capital as a financial analyst in the Memphis office. In 2018, he drove a U-Haul up I-40 to Mercer Capital’s Nashville office and began covering auto dealerships. Since then, he has worked on various types of engagements for auto dealerships including marital dissolution, gift/estate tax planning, shareholder oppression, and limited procedures buy and sell side analysis, among others.

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What is your favorite part about working with auto dealerships?

David Harkins: I like all the analytical detail provided on the monthly factory statements. There is a certain uniformity, even across the various brands, that makes it easier to analyze the dealership and compare dealerships across brands. I know right where to go for the key value drivers, such as the volumetric information and data by department.

We started our Auto Dealer blog during the depths of the pandemic, so that timing wasn’t necessarily great. But the discipline of weekly content has been extremely helpful to my understanding of the industry. That is particularly the case when it feels like industry news, trends, and disruptions are occurring on a weekly basis.

I enjoy following the industry because of its benefits when discussing expectations for dealerships with our clients. We can speak their language better than a business valuation generalist that may not do another auto dealership that year. We have the greater context of the industry at large, so we can spend more time on the key impacts they see for their brand(s) in their market(s).

How does your CFA background assist with analyzing auto dealerships?

David Harkins: I think the CFA designation has three primary benefits. The first and most important in my mind is the analytical rigor of the tests and the knowledge gained from committing to passing each level. I did not take many accounting classes at Sewanee, for instance, and it deepened my knowledge of the interaction between the three main financial statements.

Additionally, the CFA impressed upon me the importance of valuing the expected cash flows in order to determine the value of any business interest. For auto dealers, cash flows have improved since about mid-2020, and it seems increasingly likely that at least part of this benefit will be retained once the supply chain disruptions moderate. The question for valuation analysts is at what level will earnings settle?

The market largely sets the multiple for businesses where high-growth industries (e.g. big tech) are likely to receive higher multiples than declining industries (e.g., big box department stores). If the market sets the multiple, the analyst’s job is to understand the expected level of ongoing earnings, which is then capitalized by the multiple.

The corollary benefits of the designation are networking opportunities and a recognition that I have a strong analytical background. I believe these will both help me as I develop in my career, but I have yet to be able to use them fully. I received the charter in August 2020, so opportunities to meet more folks have been somewhat limited, though it’s been great to attend events such as TAA and NADC. Hopefully, the CFA will provide a nice complement to these activities.

What is a unique challenge when working with auto dealerships?

David Harkins: I think parsing the allocation of value by rooftop is interesting. Haig Partners and Kerrigan Advisors publish Blue Sky multiples in a quarterly newsletter that is brand specific (because the market tends to ascribe higher multiples to luxury dealerships, for example). This analysis quickly becomes complicated for auto groups carrying more than one brand.

Having multiple rooftops is a great expansion strategy for dealers that provides cross-selling opportunities and risk mitigation if one brand has a lackluster product lineup. It can also expose the auto group to various points along the demand curve where luxury might outperform in a strong market, whereas more economical offerings might do better in periods of market turbulence.

If a company has a Lexus and a Toyota dealership whose mid-point market multiples might be 9x and 7x, respectively, what multiple gets applied to a transaction involving both dealerships? Part of the reason dealer principals want to add rooftops is what makes this analysis more difficult: sharing of operating expenses. If a dealer principal is paid $100,000, how much of that salary is attributed to one dealership or another? Without truly separate P&L statements, it takes more art than science to determine the contribution to value of multiple rooftops.

What did your internship at Vulcan Materials Company teach you that has translated to your work with auto dealerships?

David Harkins: Prior to my internship at Mercer Capital, I got the chance to intern at Vulcan Materials. While I was an intern at Vulcan, I think I gleaned a fair amount about how a public company operates. I worked primarily with the market research department and was impressed by the internal/proprietary research available to the company. Given the large size and intentional growth exhibited by the six public auto dealership companies, I’m sure they have similar departments, which afford them numerous insights into where the competition is and where it’s going.

While industry resources are available to analysts at valuation shops like Mercer Capital, it will likely always pail in comparison to the data available to the dealerships themselves, particularly those that operate many brands across many markets. That’s why I find it so valuable to tune into the earnings calls from these companies because they get reports from on the ground relating to the day-to-day changes in supply and demand that shape the industry as a whole.

What goals do you have when it comes to working with auto dealerships?

David Harkins: I’d like to cover every brand. There isn’t an equal number of dealerships by brand across the country, and some are more prevalent than others. Some may also have different valuation needs than others.

While there are some brands I’ve worked with numerous times, there are a few I have not yet had the opportunity to work with. I’ve worked with all the domestic brands and have even been exposed to numerous high-line brands. But there are still a few mid-line import brands and luxury brands that have eluded me.

 

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