Group 1 Earnings: Technology Investment Pays Off Big as Used Vehicles Outperform the Sector

Narrow-moat Group 1’s third-quarter results bucked the trend this year of unaffordable used vehicles hurting used-vehicle segment profitability. Adjusted diluted EPS of $12.07 was an all-time record and beat the Refinitiv consensus of $11.48, sending the stock up 3% on Oct. 25 while the other five public dealers fell. We've raised our fair value estimate to $275 from $260 on the time value of money and about 4% higher revenue modeled over our five-year explicit forecast period to reflect 2023 results so far. Detroit Three brands make up about 21% of new-vehicle unit volume this year, and the United Auto Workers strike has also shut down GM's and Stellantis’ parts distribution centers that supply dealers' lucrative service operations. However, Group 1 stocked up on parts in anticipation of the strike and is moving them around stores as needed. Those two automakers have been using salaried workers to ship some parts to dealers, but CEO Daryl Kenningham said parts shortages are coming soon without a strike resolution, though the impact may not be severe. With total liquidity of over $700 million plus no major debt maturities until 2027, Group 1’s balance sheet is in good enough shape to handle more turbulence, in our view.