Company Reports

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

Asbury Automotive Group's second-quarter same-store revenue declined 6.6% year over year, with all segments down except for service, which increased about 1%. Management said the firmwide conversion to the Tekion dealer management system is 70% complete and will finish in October.

Asbury Automotive Group's same-store revenue fell 8.8% year over year in the first quarter, with all segments down save for a tiny increase in service. Management said January started well, but continued winter weather, especially in the northeast, was too much to overcome.

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 Automotive's fourth-quarter earnings showed that debt reduction following the Herb Chambers acquisition is ahead of management's timeline, and the Tekion dealer management conversion is now at over 25% of all stores, with 23 more stores converted since the third quarter.

Asbury's third-quarter adjusted diluted earnings per share increased 13% year over year to $7.17. The firm switched its Washington, D.C. area stores' dealer management system to Tekion and didn't report major problems integrating the Herb Chambers acquisition in New England, which closed in July.

Asbury's second-quarter adjusted diluted earnings per share of $7.43 beat the $6.86 LSEG consensus, but the stock still fell 3.9% on July 29. The company also closed on the Herb Chambers acquisition on July 21, giving Asbury its first presence in Boston and New England.

Asbury Automotive Group's first-quarter adjusted diluted EPS of $6.82 beat the $6.68 LSEG consensus. Same-store sales grew for new vehicles and service, but total same-store gross profit fell about 2% year over year. Service, however, posted 5% profit growth.

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.

The White House on March 5 said that the 25% tariffs on vehicles imported into the US from Canada and Mexico that began a day earlier will be delayed for one month, provided those vehicles comply with the United States-Mexico-Canada Agreement. The change came after President Donald Trump spoke with the leaders of the Detroit Three, who argued that the tariffs hurt firms such as theirs but not those that export vehicles into the US from nations such as Japan, Germany, and South Korea. White House comments to the media on March 5 indicate that tariffs on all vehicle imports regardless of the country of origin will still commence on April 2, so we think 25% or reciprocal tariffs will start at that time.

The 25% tariffs on all US imports from Canada and Mexico began March 4. These tariffs are punishment for what President Donald Trump feels are inadequate measures by these two nations and China for fentanyl and illegal immigration into the US. Lately, White House rhetoric seems more focused on fentanyl than immigration. We consider these tariffs very bad news for our US autos coverage, but for now, we're leaving our fair value estimates in place.

Asbury Automotive Group announced Feb. 18 that it is acquiring privately owned auto dealer group The Herb Chambers Companies for $1.34 billion and intends to close the deal late in the second quarter using cash and credit lines. That price breaks down as $750 million for goodwill and $590 million for real estate. Additional consideration will be paid for Chambers’ vehicle and parts inventory. We are leaving our fair value estimate in place but will incorporate the deal when we roll our model for the 10-K. Our initial review of the deal suggests it is roughly fair value estimate neutral to slightly accretive. We expect the deal will close but if not, Chambers may have to pay Asbury a $100 million termination fee.

Asbury Automotive Group finished 2024 with record fourth-quarter revenue and adjusted diluted earnings per share of $7.26, up 2% year over year, surpassing the $6.04 LSEG consensus, sending the stock up 11.5% on Jan. 30. We are not changing our fair value estimate but will review all modeling assumptions when we roll our model for the 10-K. Same-store revenue rose 6%, with all segments growing except used vehicle retail. Same-store adjusted overhead costs as a percentage of gross profit rose by 109 basis points but remains at a good low level at 62%. Total same-store gross profit only rose 2% on declines in both new and used vehicles, which hurt expense leverage, however, service gross profit increased 11%. Higher recall business helped the warranty gross profit grow 26%, but customer pay increased by 13%, which means good off-warranty retention. Management cited Stellantis inventory as holding back profit from being even better. The automaker is 8% of new vehicle revenue, and CEO David Hult said many of the firm’s franchises nationwide had the wrong inventory and had to excessively discount.

We expect trade policy and electric vehicle tax credits to be the US auto industry focus of a second US presidential term for Donald Trump. Emission regulations will also likely come into play, as we don't expect the Trump administration to grant California a waiver to set its own rules under the Clean Air Act of 1970. We also expect Environmental Protection Agency rules for 2027-32 model years issued in March, which, relative to the 2026 rule, call for a nearly 50% reduction in average light vehicle fleet carbon dioxide emissions for 2032 down to 85 grams (73 for cars and 90 for trucks) of C02 per mile, to be reduced or eliminated.

Asbury Automotive’s third-quarter adjusted diluted earnings per share of $6.35 fell short of the $6.58 LSEG consensus and declined 21.8% year over year. Still, we think the company had a solid quarter despite many challenges, particularly from BMW, Toyota, and Lexus stop sales on certain desirable light-truck models, costing about 1,200 new-vehicle units sold, and major disruption from Hurricane Helene. We see no reason to change our fair value estimate. Management estimated that adjusted EPS would have been $6.74-$6.78 absent these challenges. Stop sales bring an opportunity for future service work, but that is not likely to happen until the fourth quarter and during 2025. Toyota has a fix for the Grand Highlander and Lexus TX, but service will not all be done in 2024.

Asbury’s second-quarter adjusted diluted EPS of $6.40 fell short of the $7.33 LSEG consensus and sent the stock down 10.7% on Aug. 2. Adjusted results include management’s estimate of a $0.95 to $1.15 EPS hit from the cyberattack on dealer management system vendor CDK that started June 19. Asbury uses CDK at all its stores except for the Jim Koons stores acquired in December, which make up about 13% of Asbury’s store count. Once service was fully restored on July 8, employees needed 12 days to enter transactions since June 19 into the accounting system. The service segment alone had 100,000 repair orders to enter. CEO David Hult said on the call that most of the lost business will not be made up in subsequent quarters because it was either lost service business or customers did not want to wait to buy a vehicle. Asbury may receive insurance recoveries, but the timing and amount of that is uncertain. We are lowering our fair value estimate to $295 from $300 after reducing revenue over our five-year explicit forecast period by 3.2%. This change is to adjust projections for how 2024 is trending.

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 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.