Morningstar

Asbury Earnings: We View the Market’s Reaction as Overreaction

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Securities In This Article
Asbury Automotive Group Inc
(ABG)

We find Asbury Automotive Group’s ABG 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.

We continue to see Asbury’s growth runway as long due to the fragmented nature of the U.S. dealer space. Management 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 so far this year acquisition activity has been quiet as management is not finding quite the right fit. If the 2025 targets are reduced, we’d expect share repurchases to accelerate because management always views acquisitions relative to buying back its own stock. We also may reduce our fair value estimate in that scenario to reflect 2025 revenue well below $32 billion.

Buybacks this year through April 24 totaled $27 million for 142,000 shares ($190.14 per share), which is about 0.6% of the year-end 2022 diluted share count. The authorization has $184 million remaining and we expect the board to increase it as soon as this year. Cash including funds in floorplan offset accounts was $1.1 billion at quarter-end, so that balance plus $672 million on a credit line are ample funds for buybacks and acquisitions. We’re glad to hear management say it sees no pullback of credit availability to consumers and we continue to expect U.S. auto sales to grow in 2023-24 even if there’s a recession.

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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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, 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, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. 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 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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