Asbury Automotive Earnings: Used Vehicle Affordability Squeezes Profit but Margin Remains High

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.