Company Reports

Asbury reported first-quarter 2024 results that, like many auto dealers, reported strong headwinds in both new and used vehicle profitability. We are lowering our fair value estimate to $300 per share from $330 on a higher share count than previously modeled and higher floorplan interest expense throughout our five-year explicit forecast period in light of how both figures look after first-quarter results. The latter change lowers our midcycle operating margin by 20 basis points to 5% and constitutes most of the fair value decline. We still consider Asbury one of the top dealer operators in our coverage, and its growth runway to $30 billion annual revenue by 2030 remains in place given the highly fragmented nature of the sector and Asbury’s access to capital. We like the firm repurchasing its stock for $50 million in the quarter since it’s well below our fair value estimate.

Although no auto dealer is immune to macroeconomic risks, Asbury Automotive Group's size, focused acquisition strategy, and diverse revenue streams should allow the firm to keep growing at the expense of smaller dealers.

Although no auto dealer is immune to macroeconomic risks, Asbury Automotive Group's size, focused acquisition strategy, and diverse revenue streams should allow the firm to keep growing at the expense of smaller dealers.

Asbury finished 2023 with fourth-quarter results hurt by used vehicle affordability headwinds and new vehicle profitability coming off record highs caused by the chip shortage. These are problems common in our dealer coverage, so we don’t think our Asbury investment thesis is broken. However, management followed through with its previous plan to update the $32 billion 2025 revenue target when it reported year-end 2023 results. The new target is at least $30 billion of sales sometime between 2025 and 2030. No breakout was given between organic growth, acquisitions, and Clicklane.

Although no auto dealer is immune to macroeconomic risks, Asbury Automotive Group's size, focused acquisition strategy, and diverse revenue streams should allow the firm to grow at the expense of smaller dealers.

Most automakers reported final sales numbers for 2023 on Jan. 3. Adjusting for one selling day fewer, Wards put the year-over-year December sales increase at 17.3% and the seasonally adjusted annualized selling rate at 15.83 million, up from 13.55 million in December 2022. Full-year sales increased 12.4% to 15.46 million. We think the worst of the chip shortage is finally behind the industry, but we expect some supply shortages in 2024. As inventory continues to recover, we expect incentives as a percentage of average transaction price to keep rising from artificially low levels of barely above 2% in late 2022 (currently just over 5%), which will pressure automaker and dealer margins in 2024 relative to the past two years. Better inventory and U.S. interest rates likely done rising should bring some consumers back to the showroom. Affordability remains a challenge though, so we expect only a small increase in 2024 light-vehicle sales to the high 15 million range.

At the Los Angeles auto show on Nov. 16, Hyundai announced a partnership with Amazon in which, starting next year, some of its dealers will sell new vehicles on Amazon.com. The news sent each of the six franchise dealers and CarMax down about 5%-8%, which we think is a large overreaction predicated on fears of Amazon taking share away from dealers. Such a risk is not even possible on new vehicle sales due to state franchise laws, nor do we think it is likely that Amazon wants to do all aspects of auto retailing such as handling and disposing of trade-ins, service, and finance and insurance offerings. Service is a very underappreciated benefit that dealers provide customers when comparing the traditional auto industry to digital retailing and electric vehicle startups' direct sales formats. Should Amazon directly sell used vehicles someday, CarMax would have more competition, but it also has the ability to sell via brick-and-mortar, digital-only, or any combination of both depending on what the customer wants, something a digital-only retailer cannot offer. Our auto coverage has been implementing omnichannel tools for years and we doubt that any of their management teams are surprised by the Amazon news.

Asbury Automotive’s third-quarter adjusted diluted EPS fell 12% year over year to $8.12 and missed the $8.44 Refinitiv consensus, sending the stock down 6.4%. We leave our fair value estimate in place but are becoming increasingly skeptical about management reaching its 2025 revenue target of $32 billion, given annual revenue, including the over $3-billion Jim Koons acquisition yet to close (see our Sept. 8 note), puts the firm at about $18 billion. Asbury has guided to $6.9 billion of acquired revenue across 2023-25, so even after Koons it needs to acquire nearly $4 billion of annual revenue by early 2025 to approach $32 billion that year, assuming growth plans from Clicklane and organic sales don't change. Management will update its 2025 plan when it reports its fourth quarter and we won’t be surprised to see a reduction in the revenue target to the range of $28 billion-$30 billion. This risk is more likely than earlier this year, given management said on the Oct. 24 earnings call that paying down debt from credit line draws to help fund the Koons deal will be a focus in 2024. Net debt/EBITDA is now 1.7 times and will likely be in the mid-2.0 times range after closing Koons, while management targets 2.0 times or lower by end-2024. Still, it's possible Asbury could lower leverage for most of 2024 and then late next year announce a massive acquisition, but we don’t expect management to make a huge deal solely to chase a target.

On Sept. 8, Asbury Automotive Group announced an agreement to buy the 20-store Jim Koons Automotive Group for about $1.2 billion. For Asbury, which receives 29 franchises selling 15 brands and six collision centers, the deal is its entrance to the Washington, D.C., area. The transaction will close in the fourth quarter or in early 2024 and be funded via cash and credit lines. We are lowering our fair value estimate by about 9% to $360 per share because we've been modeling $480 million of 2023 acquisition spending. We feel Koons' 2022 revenue of over $3 billion and its size as the 23rd-largest U.S. auto dealer, according to Automotive News, merits a premium to the 0.3 price/sales multiple we had been assuming for 2023 deal spending. It is Asbury's first deal since announcing its $32 billion 2025 revenue target in April 2022 and management has guided to $6.9 billion of acquired revenue across 2023-25. It also said earlier this year that it will update the 2025 plan at the end of this year. If the $32 billion target is lowered, we'd expect more share repurchases but may also reduce our fair value estimate to reflect less revenue.

Although no auto dealer is immune to macroeconomic risks, Asbury Automotive Group's size, focused acquisition strategy, and diverse revenue streams should allow the firm to grow at the expense of smaller dealers.

We are not changing our Asbury fair value estimate after the firm reported second-quarter adjusted diluted EPS of $8.95 that beat the $8.24 Refinitiv consensus. Management in April said it will provide an update on its 2025 revenue and EPS targets of $32 billion and at least $55 per share, respectively, at the end of this year. This plan assumed $6.9 billion of acquired revenue for 2023-25, but 2023 has only seen divestitures. CEO David Hult said on the call that they are in aggressive conversations on deals, so something may be looming. If the 2025 targets are reduced, we’d expect share repurchases to accelerate but we may also reduce our fair value estimate in that scenario to reflect 2025 revenue well below the approximately $32 billion we currently model. So far in 2023, Asbury has repurchased $211 million, or 1.1 million shares, and in May the board approved new authorization of $250 million. The balance sheet looks solid to us with adjusted net debt/EBITDA at 1.7 times, which is well below management’s target range of 2.5 to 3.0 times.

We find Asbury’s stock falling 9.3% after it reported first-quarter earnings on April 25 to be excessive, so we are not changing our fair value estimate. Adjusted diluted EPS fell 9.7% year over year to $8.37 which still beat the $7.99 Refinitiv consensus. It should not be surprising that dealers’ earnings are declining year over year as used vehicle profitability remains challenged due to expensive inventory procurement costs, while new vehicle profitability gradually comes off record highs from the chip shortage. Same-store revenue fell by 1% with only new vehicle and service posting growth, but to us this is not a reason for the stock to fall as much as it did.

Although no auto dealer is immune to macroeconomic risks, Asbury Automotive Group's size, focused acquisition strategy, and diverse revenue streams should allow the firm to grow at the expense of smaller dealers.

Asbury Automotive ended 2022 with a strong fourth quarter, giving us no reason to change our fair value estimate. We will revisit all modeling assumptions after the 10-K is filed. Adjusted diluted EPS rose 22% year over year to $9.12, easily beating the $8.21 Refinitiv consensus. The company has now lapped the year-over-year comparisons with the late December 2021 acquisition of Larry H. Miller, so 40% revenue growth in the fourth quarter (up 1% same store) should be down significantly year over year in 2023 unless another large deal occurs. Same-store gross profit declined 2% as new-vehicle gross profit per unit fell 11% to $5,684 on flat volume while used-vehicle GPU declined 31% to $1,842. New-vehicle profit has been very inflated due to the chip shortage, which has caused very high used-vehicle prices that have also squeezed used margins. This dynamic should unwind throughout 2023 and 2024. CEO and president David Hult said new-vehicle inventory recovery will be faster this year for domestic makers like Stellantis, while a slower recovery is on tap for Toyota and Honda. Hult expects 2023 U.S. light-vehicle sales in the mid-14 million range, consistent with our expectation.

2022 U.S. light vehicle sales per Wards were 13.7 million, an 8.1% decline from 2021 and their worst year since 2011’s 12.8 million. December sales, however, grew 4.9% year over year with the seasonally adjusted annualized selling rate at 13.31 million, up from December 2021’s 12.72 million. The chip shortage rather than poor demand is to blame and we expect one more year of constrained production for the industry. Regardless of high interest rates and average transaction prices over $45,000, we feel U.S. autos have been at recessionary levels for a lot of the time since spring 2020, so we expect 2023 sales to rise by midsingle digits. Gradual improvement in new vehicle inventory should help used vehicle pricing eventually be more affordable for consumers, which is also good for dealers’ used vehicle margins that are currently squeezed by high procurement costs.

Asbury’s third quarter gave us no reason to change our fair value estimate and we think the auto dealers’ results overall have shown the sector is not suffering from poor demand for autos. Diluted EPS of $9.23 grew by 22% year over year and beat the Refinitiv consensus of $9.22. Hurricane Ian late in the quarter cost the firm $0.14, or $4 million pretax, but some of this may get recouped over the next few quarters as consumers replace vehicles lost in the storm or buy a vehicle they would have otherwise bought in third quarter but were unable to shop because of the hurricane.

Asbury’s all-time record quarterly adjusted diluted EPS of $10.04 (Refinitiv consensus was $8.82) rose 29% year over year and gave us no reason to change our fair value estimate. Same-store revenue fell 7% on a 22% new vehicle decline from the chip shortage, but new vehicle gross profit rose by 3% thanks to a 49% rise in new vehicle gross profit per unit to $5,793, offsetting a 31% fall in new vehicle volume. We see the stock as undervalued and remain confident management can meet or exceed its 2025 targets (given in April) of at least $55 EPS and $32 billion of revenue. The dealer sector is highly fragmented, and we see Asbury in a great position with about $1 billion of liquidity to keep growing via acquisitions, organically, and digitally with its Clicklane tool while buying back shares, though all of the first half’s $200 million in buybacks occurred in first quarter. Management wants its net leverage ratio to be about 2 times before resuming acquisitions following the large purchase late last year of Larry Miller dealerships, and the June 30 ratio is 2.1 times, down from 2.7 at Dec. 31. Acquisitions are the first priority for capital, but we expect more buybacks this year and we’d welcome lots of buybacks given the stock trades well below our fair value estimate. That said, we like that about $200 million of debt has been retired this year.

Asbury’s first quarter was an all-time record with adjusted diluted EPS of $9.27 beating the Refinitiv consensus of $8.94. Same-store revenue grew 5% year over year and a 20% decline in same-store new vehicle unit volume was easily offset by 67% gross profit dollar growth in new vehicles and 23% overall on a same-store basis. This rise in gross profit dollars came thanks to new vehicle gross profit dollars per unit up 109% to $5,750 as well as from strong double-digit growth in nearly all other segments. The chip shortage will likely keep inventory very lean for the rest of 2022 and CEO David Hult does not expect inventory to normalize until next year. Industry levels have improved, with Wards data putting end of March inventory at its highest level since last summer, but the vast majority of whatever units come to a dealer are already sold, which makes restocking difficult. We expect similar results for the rest of 2022.

Although no auto dealer is immune to macroeconomic risks, Asbury Automotive Group's size, focused acquisition strategy, and diverse revenue streams should allow the firm to grow at the expense of smaller dealers.

Although no auto dealer is immune to macroeconomic risks, Asbury Automotive Group's size, focused acquisition strategy, and diverse revenue streams should allow the firm to grow at the expense of smaller dealers.