2023-07-12 03:58:53 ET
Summary
- Asbury Automotive Group's shares have outperformed the broader market despite weakening financial performance.
- The company's Clicklane initiative, an omni-channel platform for vehicle search and acquisition, has performed well, selling 10,800 vehicles in Q1 2023, a 93% YoY increase.
- Despite worsening fundamentals, ABG's shares look attractive compared to its peers and the company continues to buy back stock, making it a soft 'buy' for investors.
To some investors, it may seem crazy to buy stock in a company that is experiencing a significant weakening on both its top and bottom lines. But the good news is that, when you buy a company for cheap enough, even a worsening of financial performance can result in attractive returns. This is because the market often overreacts to bad news or the perception that the picture will worsen. A great example that I could point to involving this is automotive retailer Asbury Automotive Group ( ABG ). Over the past several months, shares of the company have drastically outperformed the broader market. Recently, sales, profits, and cash flows, have all experienced some pain. I would argue that this pain will likely continue for the foreseeable future. But even with this factored in, I would say that some additional upside likely is warranted from here.
A look at recent pain
In early January of this year, one company that I found myself drawn to was Asbury Automotive Group. The article that I wrote at that time was not the first article I had written about the firm. But just like the prior work I had done on it, I walked away with a bullish thesis. At that time, the company was still seeing strong sales, earnings, and cash flow growth. Strong unit pricing and acquisitions were the key drivers of this expansion. The firm was seeing some weakness in terms of the number of vehicles being sold. But even with that, shares were cheap enough to warrant a degree of optimism. This led me to keep the company rated a 'buy' to reflect my view at the time that the stock should outperform the broader market for the foreseeable future. Since then, things have gone quite well. While the S&P 500 is up 14.4%, shares of Asbury Automotive Group have jumped 35%. And since I first rated the company a 'buy' back in July of 2022, shares are up 42.3% compared to the 11.5% the S&P 500 experienced.
Fast forward to today, and the company is finally seeing some weakness on both its top and bottom lines. Consider how the business performed in the first quarter of its 2023 fiscal year, as an example. Revenue of $3.58 billion translated to a year over year decline of 8.4% compared to the $3.91 billion reported the same time one year earlier. With the exception of parts and services revenue, which managed to grow about 3% year over year, all of the company's major revenue categories worsened. The number of new import vehicles the company sold fell about 16% from 20,678 to 17,389. Domestic sales fell roughly 15% from 10,239 to 8,688 The only increase for the company came from its luxury vehicles. These inched up about 2% from 8,257 units to 8,429. On a same store basis, the picture was a bit different. New import units dropped 4% while new domestic units fell 12%. Luxury units, meanwhile, jumped about 9% year over year. It is refreshing to see demand on that front.
What helped the company was that overall revenue per new vehicle sold actually increased by about 8% from the first quarter of 2022 to the first quarter of 2023. On the used vehicle side of things, however, the pain was more severe. The number of used vehicle retail units that the company sold plummeted 14% from 38,306 to 32,989. Even revenue generated per used vehicle experienced weakness. It fell by roughly 3% year over year from $31,770 to $30,969. Naturally, a decline in sales would bring with it a drop in revenue associated with finance and insurance activities. Net revenue under this category for the company fell by roughly 15%. This is rather painful because, even though it accounts for only a small portion of overall sales, the margin associated with it is significant. In the first quarter of 2023, the gross profit margin on finance and insurance activities stood at 91.7%.
Naturally, the decline in revenue for the company brought with it a decline in profits as well. Net income plummeted from $237.7 million in the first quarter of 2022 to $181.4 million in the first quarter of this year. Operating cash flow was cut by more than half from $409 million to $171.7 million. But if we adjust for changes in working capital, the picture would have been significantly better with a decline from $243.8 million to $220.7 million. Meanwhile, EBITDA for the company managed to fall from $335.7 million to $293.7 million. As you can see in the chart above, all of this performance, both top line and bottom line, is significantly different from what the company experienced from 2021 to 2022. During that time, almost all of the indicators shown for the business improved year over year.
Even though the company is struggling at the moment, it is still experiencing some really positive results. For instance, its Clicklane initiative is performing incredibly well. For those who may not recall or who have not heard of this, Clicklane is a tool that the company offers that provides customers with an omni-channel experience when it comes to searching for and acquiring vehicles. The platform even allows things such as service scheduling, vehicle management, and the ability to sell one's own car. During the first quarter of the year, the company sold 10,800 vehicles through the platform. That's a 93% increase over what it sold on it one year earlier and it's 28% higher than what the company achieved in the final quarter of 2022. $450 million of revenue was generated through the platform and the company is on track to generate $2.5 billion in sales from it this year alone. In addition to this, management is also continuing to buy back stock. From the start of the year through late May, the company repurchased at least 1.1 million shares for $211 million. And at the tail end of that month, the company issued a new $250 million share buyback program to replace the prior one that had been exhausted.
When it comes to valuing the company, the picture is a bit tricky. Given the worsening fundamental picture, investors would be wise to assume that the company would not be as attractive as it would be if we were to use data from 2022. In the chart above, you can see how shares are priced using data from both 2021 and 2022. Even with the 2021 data, shares do look attractive at this point in time. In the table below, meanwhile, I compared with the firm to five similar enterprises. Because they are all going through the same kind of troubles that Asbury Automotive Group is going through, I did use the 2022 figures across the board. Using both the price to earnings approach and the price to operating cash flow approach, Asbury Automotive Group ended up being the cheapest of the group. Meanwhile, using the EV to EBITDA approach, only one of the companies was cheaper than our target.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Asbury Automotive Group | 5.3 | 4.8 | 6.2 |
Group 1 Automotive ( GPI ) | 5.6 | 7.7 | 6.0 |
Sonic Automotive ( SAH ) | 76.5 | 15.8 | 12.0 |
AutoNation ( AN ) | 7.1 | 6.0 | 6.6 |
Lithia Motors ( LAD ) | 7.7 | 24.4 | 8.2 |
Penske Automotive Group ( PAG ) | 9.7 | 9.1 | 8.0 |
Takeaway
Fundamentally, Asbury Automotive Group is seeing its picture worsen. Honestly, that trend will likely continue for the foreseeable future. But this doesn't mean that the company is a bad prospect. At the moment, it's cheaper than its peers. On top of this, it looks attractive even if we assume financial performance reverts back to what it was in 2021. Management continues to buy back stock and their innovation in the form of Clicklane it's truly a promising. Based on all of these results, even though I think the easy money has been made, I do believe that further upside is probably still on the table. As such, I have decided to keep the company rated a soft 'buy' at this time.
For further details see:
Asbury Automotive Group: Additional Upside Exists From Here