2023-07-26 06:15:00 ET
Summary
- Asbury Automotive Group has seen significant success in the last decade, doubling its franchise footprint and generating ~20% compounded returns for shareholders.
- ABG's success is attributed to its operations playbook for new acquisitions, which includes improving franchise operating efficiency and selling higher margin, less cyclical lines of business.
- Despite being undervalued, Asbury is considered an attractive investment due to its less cyclical cash flows, strong capital allocation, and attractive valuation.
The following segment was excerpted from this fund letter.
Asbury Automotive Group ( ABG )
Asbury Automotive Group is a mid-capitalization company and one of the largest automotive retailers based in the United States. Asbury operates 190 franchises located primarily in southeastern and southwestern metropolitan markets. The retail automotive industry is highly fragmented, however Asbury has generated outstanding ~20% compounded returns for shareholders over the last ten years. We believe the factors that helped the company achieve this success remain in place today and that Asbury’s intrinsic value exceeds its June 30 share price by more than 40%.
Asbury’s success resulted from nearly doubling its franchise footprint in the past 10 years from 98 franchises to 190 franchises (152 dealerships / 38 collision centers). Asbury profitably doubled its footprint by acquiring and integrating franchises at attractive prices. To underline the scale of Asbury’s capital deployment: in 2012 the company had ~$1.4 billion of capital deployed, by 2022 this figure had grown 5x to ~$7.4 billion. Clearly, Asbury saw an attractive opportunity in franchise acquisitions.
Asbury has an operations playbook for its new acquisitions that:
- improve franchise operating efficiency (more inventory turns, floorplan financing, geographical clustering within a market for scales of economy); and,
- sell higher margin and less cyclical lines of business (parts/services and finance/insurance products).
Based on our studies of Asbury’s acquisitions and financial history, we estimate that Asbury’s after-tax incremental returns on capital were ~13%+. Asbury’s historically high debt levels helped turn ~13% incremental returns on capital into greater than 20% incremental returns on equity. Attractive capital deployment, high reinvestment rates, and leverage drove returns.
Asbury’s management team continues to outline a large pipeline of franchise acquisition opportunities that should reward shareholders. Further, we believe Asbury’s go-forward incremental returns on capital might even exceed past returns driven by two capital-light product additions to its operations playbook: (i) expansion of its finance/insurance business line into repair/maintenance contracts through a 2021 acquisition named Total Care Auto (TCA); and (ii) franchise integration with Clicklane, Asbury’s online vehicle retail platform.
Broadly, we believe public markets have undervalued automotive retail companies based on risk factors against which Asbury has thoughtfully prepared itself:
Disintermediation by online-only retailers | Clicklane is a 100% online solution for automotive acquiring, financing, insuring, registration, and home delivery. Clicklane integrates with Asbury’s physical footprint, to provide service that other online-only services cannot. Clicklane and Asbury are focused on profitable unit economics, which have been elusive for online-only competitors. |
Impact of autonomous vehicles ((AVs)) | We believe large-scale autonomous adoption is at least ten years away due to technological, infrastructure, and regulatory factors. In a downside scenario with no place for Asbury in the AV value chain, Asbury’s terminal valuation is controlled by the valuable owned real estate on which the company’s franchises currently operate. |
Impact of electric vehicles ((EVs)) | EVs concern the market because they have fewer moving parts than internal combustion engine vehicles and fewer high-margin parts and services appointments. However, Asbury reports that given the complexity of batteries, price per service is much higher. EVs are their “highest repair order dollars per ticket.” |
Manufacturers going direct to consumer ((DTC)) | DTC risk has existed for decades, but distribution is a large barrier for manufacturers. Auto manufacturing is competitive with low returns on capital that prevent excessive risk taking. Tesla’s struggles with services and repairs despite driver loyalty support this view, and other manufacturers would have faced brand impairment with a DTC model. |
We believe Asbury is an attractive investment for the following reasons:
- Less cyclical cash flows: Asbury employs a razor–blade model, with cars sold as the low margin “razor”, and finance/insurance and parts/services as the higher margin “blade”. The “blade” segments represent only 19% of revenues but 61% of gross profits, are not as cyclical as automotive sales, and are growing share of profit as new service capabilities are integrated.
- Management track record of strong capital allocation: The large opportunity remains to acquire franchises at attractive 13%+ after-tax returns on capital. Asbury has a lower leverage level than management’s target range which provides capacity to deploy capital via franchise acquisitions and share repurchases. Management has opportunistically repurchased 5% of outstanding shares at attractive levels in the last 12-months.
- Attractive valuation: In 2015, Berkshire Hathaway acquired Van Tuyl Group, the largest privately-owned automotive retailer with 100 franchises for $4.1 billion. Van Tuyl competed with Asbury and had a similar playbook. Terms were not disclosed, but we estimate Berkshire paid 78x TEV/EBITDA. By comparison, Asbury trades around 8x TEV/EBITDA on the market’s bearish consensus 2023/2024 EBITDA estimates and a low double-digit free cash flow yield. Asbury has historically traded around 9-10x TEV/EBITDA, which we argue is still low given the company’s track record of capital deployment, operational efficiency, and organic growth initiatives (like Clicklane). We believe Asbury’s intrinsic value is at least 40% greater than its June 30 share price.
IMPORTANT DISCLOSURESSilver Beech Capital Management, LLC (“Silver Beech”) is a New York limited liability company that serves as the investment manager to Silver Beech Capital, LP (the “Fund”), a Delaware limited partnership. The principals of Silver Beech are James Hollier, who serves as the portfolio manager and managing partner of the Fund, and James Kovacs, who serves as the managing partner of the Fund. All performance results presented herein refers to the performance of an unrestricted investor in the Fund since its inception. Net performance is presented net of the highest performance allocation in effect at the time (20%) above a 6% hurdle rate, the highest actual management fees (1.0%) charged at the time, and net of other expenses, and includes the reinvestment of all dividends, interest, and capital gains. Performance for investors who subscribed on different dates, or who pay different fees would necessarily be different from the performance presented herein. The rate of return is calculated on a “time weighted” rate of return basis, which minimizes the effect of cash flows on the investment performance of the Fund. All monthly performance data presented herein reflects unaudited data, unless otherwise specified, and as such its accuracy cannot be guaranteed. Past performance is not necessarily indicative of future results. All securities transactions involve substantial risk of loss. The material presented is compiled from sources thought to be reliable, including in certain instances, from outside sources, but accuracy and completeness cannot be guaranteed. Any opinions expressed herein reflect the judgment of Silver Beech and are subject to change. The information in this letter is for discussion purposes only. Nothing contained herein should be construed as an offer to sell, or a solicitation of an offer to buy or sell any security or investment strategy or a recommendation as to the advisability of investing in, purchasing or selling any security or investment strategy, which may only be made in the Fund’s confidential offering memorandum and operative documents (collectively, the “Offering Documents”). Before making an investment decision with respect to the Fund, prospective investors are advised to read the Offering Documents carefully, which contain important information, including a description of the Fund’s risks, investment program, fees, expenses, redemption and withdrawal limitations, standard of care and exculpation, etc. Prospective investors should also consult with their tax and financial advisors as well as legal counsel. The Offering Documents are the sole documents on which a potential investor is entitled to rely in evaluating an investment in the Fund. The information in this letter does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific prospective investor, and an investment in the Fund may not be suitable for many prospective investors. This letter is not intended to be, nor should it be construed or used as, investment, tax or legal advice. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
For further details see:
Silver Beech Capital - Asbury: Large Pipeline Of Rewarding Opportunities, Yet Intrinsically Undervalued