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Asbury Automotive Earnings: Profit Margins Remain High Despite Falling Earnings

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Asbury Automotive Group Inc
(ABG)

We are not changing our Asbury ABG 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.

Although adjusted overhead costs as a percentage of gross profit increased by 112 basis points, the level is still excellent at only 57.0% which helped enable adjusted operating margin of 7.8%. This margin is still a 70-basis-point decline but also a very high number for a dealer. Cost controls are effective while the company loses some efficiencies this year transitioning recently acquired stores, such as the legacy Larry H. Miller Group locations, over to Asbury’s computer systems. Poor used vehicle affordability did send used unit volume down 21% year over year versus just a 1% new vehicle unit decline. Total gross profit fell 11% as improving inventory drove new vehicle gross profit per unit down 15%, while used affordability for both consumers and Asbury dragged used retail GPU down 18%. These declines are large but not surprising given the industry is coming off record new vehicle profits enabled by the chip shortage.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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David Whiston

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007.

Before Morningstar, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner. In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011.

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