2023-04-28 06:20:04 ET
Summary
- Asbury Automotive is a Fortune 500 company, and one of the largest and most recognized car dealers in the United States, with 139 locations in 14 states across the country.
- I assumed that the development of in-depth digital channels, further efforts, and emphasis on Clicklane will likely bring significant revenue growth.
- Advertising campaigns, acquisitions, higher conversion numbers, and SAAR increase are expected to bring impressive financial figures.
Auto retailer Asbury Automotive Group, Inc. ( ABG ) recently delivered impressive guidance for the year 2025, including net sales of around $32 billion driven by a growth plan. I believe that successful digitalization, more hiring, and successful integration of acquisitions could bring significant economies of scale. Even taking into account risks from the total amount of debt or risks arising from the relationships with car manufacturers, I believe that the fair price for the stock is close to $261 per share.
Asbury Automotive: A Lot Of Luxurious Cars, And Double Digit Sales Growth
Asbury Automotive is a Fortune 500 company, and one of the largest and most recognized retailers in the United States, with 139 locations in 14 states across the country. As of December 2022, the company operated 186 new car franchises, representing 31 brands at its 139 distribution points, 32 auto exterior repair centers, seven used car sales centers, one auto auction point, and auto insurance coverage services in 14 states where it has its points of sale.
Asbury offers a large number of services related to purchasing access to automobiles, whether they are new and arrived from the manufacturing plants of the original producers as well as used cars of different ages. It also offers repair and maintenance services in specialized workshops, parts replacement and collision repairs, and the coverage service for accidents or theft.
On top of these services we can add long-term contracts for the protection of assets. This format of operation gives the company a wide margin in the diversification of its services, in a way to be up to the task of responding to any relationship or complication present with the manufacturers or distributors besides being able to cover the changing need for customers and their preferences.
The company is in a process of innovation regarding the use of its services, carrying out a digital platform called Clicklane, the first 100% digital retail market tool, with the aim of facilitating and improving the shopping and user experience of its customers. Another relevant fact is the active acquisitions strategy that Asbury developed in recent years, including, for example, the sale of some franchises or the purchase of Harry Miller's businesses, which led Asbury to accommodate its operations in two segments.
These two segments are dealerships and TCA. The dealership segment represents the highest sales and income figures. This segment includes all operations related to sales and distribution centers, from the arrival of automobiles to franchising as well as presentation and sales operations to their customers.
I believe that Asbury Automotive is quite successful thanks to the type of cars being offered. With 34% of luxury brands, I think that Asbury Automotive can attract the attention of clients, and also offer domestic brands and imported brands. In my view, investors will do good by paying special attention to the car brands offered.
The TCA segment, on the other hand, includes a wide variety of products and services that Asbury offers its buyers, such as parts repair or replacement centers, accident or theft coverage, and advice from specialists in any of these situations. It works in some cases with long-term contracts, ensuring profits for the service, similar to current insurers. This segment also deals with the investment and management of the company's portfolio.
I believe that the numbers achieved in its most recent history clearly indicate that management knows well how to scale up the business model. We are talking about double digit revenue growth and many more new car dealerships from 2017. Asbury Automotive successfully reported double digit adjusted EPS growth and impressive increase in adjusted operating cash flow.
Market Expectations Include Double Digit Net Sales Growth And FCF Growth
I believe that those who do not know much about Asbury Automotive should have a look at the most recent quarterly earnings presentation and the expectations from management. In 2025, Asbury expects an EPS of close to $55 EPS, leverage close to 1x, and business growth close to 32% CAGR. We are talking about revenue of close to $32 billion by 2025 driven by digitalization of tools, processes, improvements for Clicklane, and showroom experiences. Besides, it is worth noting that the current CFO and leverage appear to offer sufficient liquidity for new opportunities.
In particular, Asbury Automotive laid special emphasis to opportunities arising from Clicklane. Management believes that the number of stores could increase from about 139 stores in 2023 to close to 200 stores in 2025. Advertising campaigns, acquisitions, higher conversion numbers, and SAAR increase are expected to bring impressive financial figures.
Additionally, I believe that investors will do good by having a look at the expectations for the next two years . Analysts expect net sales of $20.209 billion, net sales growth of 24%, and 2025 EBITDA of around $1.504 billion. 2025 operating profit would stand at $866 million, with an operating margin of 4.29%. Finally, 2025 net income would stand at close to $1.293 billion, with 2025 free cash flow of $806 million and 2025 capex of $481 million. I believe that considering the expected growth of FCF and net income, it is worth having a careful look at the valuation of Asbury Automotive.
Increase In Cash, Inventory, And Decrease In Total Long-Term Debt
The most recent quarterly press release includes beneficial figures about the financial statements of Asbury Automotive. As of March 31, 2023, the company reported cash worth $296 million, inventory of $1.08 billion, and total current assets of $2.05 billion. The total amount of inventory, current assets, and cash increased as compared to the figures reported on March 31, 2023.
Considering the total amount of debt, I believe that having a close look at the debt maturity schedule makes a lot of sense. The company has to pay $643 million in 2026 and $95 million in 2025 along with $405 million in senior notes in 2028 among other payments. In my view, taking into account future FCF growth, management will likely be able to negotiate with debt holders, or find new debt investors. With that, I understand that some investors are afraid of the total amount of debt.
My Assumptions And DCF Valuation
Under my financial model, I assumed that Asbury Automotive will successfully provide an exceptional experience for customers thanks to different communication channels. Additionally, I assumed that development of in-depth digital channels, further efforts, and emphasis on Clicklane will likely bring significant revenue growth.
I also assumed that Asbury Automotive will be able to attract, retain, and hire great talent, which will successfully allow the organization to grow and optimize operations. It is worth mentioning that in the past, increases in the headcount were usually followed by increases in FCF, revenue, and CFO.
Besides, I assumed further improvement of the cost margin, and increase in operational effectiveness will help Asbury Automotive bring some economies of scale. In this regard, it is worth mentioning that in the last ten years, the FCF margin, the CFO/sales ratio, and the EBITDA margin increased as the number of stores and employees increased.
The assumptions I made in my financial model included net income growth on average close to 10.2% from 2023 to 2033. I also assumed amortization growth, growing stock based compensation, inventories growth, growth in accounts receivable, and decreases in accounts payable. In sum, CFO growth and growing capex would imply FCF growth of 13% on average.
Other numbers in my DCF model included 2025 net income of $506 million, 2025 depreciation of $129 million, and amortization of debt issuance costs close to $7 million. Also, with share-based compensation close to $50 million, amortization of intangible assets of around $191 million, and deferred income taxes of $62 million, I also included unrealized loss on derivative instruments of $79 million. Finally, with changes in accounts receivable of -$251 million and changes in inventories of -$175 million, 2025 CFO would be close to $740 million. If we assume capex of -$481 million, 2025 FCF would be $259 million.
Besides, for the year 2033, I assumed a net income of $879 million, 2033 depreciation close to $138 million, share-based compensation of $101 million, changes in accounts receivable of -$645 million, and 2033 changes of inventories close to -$372 million.
Also, with changes in accounts payable and accrued expenses close to -$175 million, 2033 CFO would be close to $1.098 billion. Finally, with 2033 additions to property, plant and equipment of -$139 million, I obtained 2033 FCF of $960 million.
With a WACC of 7.5% and an EV/FCF multiple of 9x, I obtained an enterprise value close to $8.646 billion. If we add cash of $296 million, and subtract long term debt of $3.277 billion, the equity valuation would stand at $5.665 billion, and the price would be $261 per share.
Source: My DCF Model
There Are Many Competitors, Large And Small, And There Does Not Seem To Exist A Lot Of Barriers To Enter The Market
The automobile retail distribution industry and its related services are highly competitive. This industry is highly fragmented according to the regions and markets of each location. In this sense, Asbury competes with similar companies, with franchises of various brands and located nationwide.
In addition to this, small distributors, used car auctions, used car dealers or those linked to a single domestic manufacturer, car sales on the Internet, and the large number of related service points, mainly workshops and coverage plans, are competitive factors active for the company.
Risks
Among the risks that Asbury highlighted in its reports, we find the possible disruption in the supply chain and border complications for imported cars. Besides, inability to carry out the integration of new acquisitions or adapt to the conditions after franchise sales are also major risks.
In addition, in my view, breaking the contractual relations with any of the manufacturing companies would seriously affect the operations, sales, and recognition of the company. As a result, I believe that many stock owners would most likely sell their shares, which would bring a significant decrease in the stock price.
I also believe that the total amount of debt could represent a risk in the coming years. Future access to lines of credit or participation in certain capital markets would be a major problem for Asbury Automotive. Besides, if equity researchers understand that Asbury Automotive cannot finance its operations at competitive rates, in my view, we may see less demand for the stock.
Conclusion
Asbury Automotive recently delivered impressive guidance for the year 2025, after delivering very impressive figures from 2017. In my view, further digitalization, successful hiring, and acquisitions could bring economies of scale, which may enhance future FCF margins. Even considering risks from the total amount of debt, breaking relationships with manufacturers, or competition, in my view, the stock is quite undervalued. Future FCF would, in my view, justify a valuation of close to $261 per share.
For further details see:
Asbury Automotive: Fantastic Guidance Driven By Digitalization And Undervalued