$ABG– Asbury Stock Analysis:

Company Overview:

$ABG - Asbury Auto Group Inc. is the 6^th largest automotive retailers in the USA with over 200 franchises/locations across 15 states, making it large enough to be included in the Fortune 500. Asbury’s stores offer a range of automotive products and services; including new/used vehicles, vehicle parts, repair and maintenance products and services, collision repair services, and insurance/financial services.

In terms of their financial reporting, Asbury splits their revenue streams into 3 main segments. These segments include new/used cars, parts and service, and finance and insurance.

Over 50% of Asbury’s revenues come from 3 vehicle manufacturers, which include Toyota Motors (Toyota and Lexus) – 21%, Honda Motors (Honda and Acura) – 20%, and Mercedes-Benz – 10%.

Asbury has described their biggest goal as “Being the most guest-centric automotive retailer in the USA.” Asbury plans to achieve this by offering professional service that strives to maximize customer satisfaction, maximize value for their shareholders/debtholders that fuel their mission/growth, and foster an environment where staff can thrive personally and professionally.

Investment Information:

SEC Filings:

Current Report (8-K)
- On December 7^th, 2021, Asbury Auto completed their acquisition of the Larry H. Miller Dealerships and Total Care Auto (8^th largest franchised dealership in the USA).
  - The TTM revenue and EBITDA for Larry H Miller’s businesses was $5.7B, and $473M
  - The EV/EBITDA multiple from this acquisition is 6.76, which is similar to ABG’s EV/EBITDA of 6.69 (implying they got a “fair deal”)
    - Especially considering when the average auto parts EV/EBITDA multiple is 7.86, and the average Truck and Auto EV/EBITDA multiple is 39.07
  - This acquisition added 54 new dealerships, 7 used car stores, 11 collision centers, 1 used vehicle wholesale business, and their associated properties for $3.2B.
    - Part of the funding involves a $690M real-estate loan (to finance the property purchases) which bears interest at SOFR Rate (currently 0.05%, but historically 1.8-2.2%), plus 1.55-1.95% (which is dependant on their lease-adjusted leverage ratio). This financing will bear interest between 1.6% (estimated lowest) and 4.15% (estimated highest). Even at the top of the spectrum, the 4.15% interest is not horrible, and is close to ABG’s long-term interest rate paid out on their bonds.
  - Current Report (8-K):
    - On December 7^th, 2021, Asbury acquired Stevenson Automotive for $377M (paid with via cash on hand).
      - This acquisition adds 8 new vehicle dealerships as well as the property associated with these dealerships.
      - This acquisition will add $715M to Asbury’s annual revenues. This implies an EV/Revenue multiple of 0.53x, which is a bit high for the acquisition of new dealerships (0.3x is the upper limit of “normal price”)
    - Current Report (8-K):
      - On November 19^th, 2021, Asbury announced their offering of $800M worth of 4.625% Senior Notes due 2029, and $600M worth of 5% senior notes due 2032.
        
        The interest on these notes is paid semi-annually on ay 15^th and November 15^th, with the first payment on May 15^th, 2022.
      - These notes were offered in order to acquire the necessary funding for the Larry H Miller acquisition (as previously discussed).
      - ABG has a Return on Debt (ROD) of 32.7%. This is a good sign that ABG will be able to generate large amounts of income from this debt offering.
        
        Furthermore, their D/E ratio is currently 1.31, compared to the average D/E for auto dealer and Gas station companies (line 55) of 2.16

Growth Plan:

Asbury has outlined their plan for growth in their Q3 2021 investor presentation. This plan outline 3 facets of growth that they are looking to exploit. These 3 facets can be found/explained below:

Same Store Growth: Asbury desires to grow same store revenues and profits by investing in training, driving retention, increasing productivity, and putting a focus on growth in their Financial and Insurance (F&I) segment as it has high margins and can contribute to high growth.
Clicklane: Asbury plans to drive growth in Clicklane (Online New/Used Car Dealership) through increased traffic and conversion, growing their margins, and creating a more seamless/user friendly experience.
Acquisitions: In 2021, Asbury grew their annual revenues by $6.6B through their acquisitions (beating their target of $5B). Asbury plans to continue acquiring automotive companies across the USA to grow in current markets, expand into new markets, and maintain long-term growth.

Asbury is hoping that these 3 facets of growth will translate into a 20% CAGR, increase their operating margins, and grow EPS by 20%+ per year.

My Opinions on Growth:

From their investor presentation, it is evident that Asbury needs to focus on expanding their Parts & Service, and Financial & Insurance segments.

This is due to the fact that their parts and service segment is responsible for only 12% of their annual revenues but makes up 38% of their gross profits. This segment has high gross margins and can help to grow their business very quickly. Asbury has noticed this and has been focused on undergoing a digital transformation since 2016. This digital transformation included offering Online service appointments (parts and service) to their customers. Since 2016, their online appointments have grown at 42% per year. This is great news for their future and is showing that Asbury is investing in the right places (digital) to grow revenues in their segments that yield high gross margins (Parts and services).

Furthermore, Asbury’s Financial and Insurance segment accounts for 4% of annual revenues, but 21% f their gross profits. This segment yields the largest gross margins and should be the main focus for growth. Historically, Asbury has grown this segment by 5.2% annually. In the future, I would like to see them grow this segment at a higher CAGR.

ESG Initiatives:

Instead of explaining their ESG initiatives by text, I think it is better to just insert their visuals from their investor presentation.

Brand Mix:

Asbury has diversified their new and used car holdings by both brand, and class. Asbury carries over 29 brands of vehicles that span across 3 classes of vehicle (luxury, import, and domestic). By diversifying across these spaces within the automotive industry will help Asbury decrease their risk. A chart displaying these classes/brands can be found below.

Management Team:

This sectioned is designed to give you (the reader) insight into the background of the highest (executive) managers/officers at Asbury. The following people are listed as the highest-ranking members of the Asbury Management Team.

David Hult (President & Chief Executive Officer): Mr. Hult joined Asbury as Executive VP and COO in November 2014. David is responsible for Asbury’s strategy and is also the senior liaison to Asbury’s board, investors, and manufacturing relationships. In his role as CEO, he will remain hands-on working with operations leadership in developing strategic policies and programs to drive profitable and stable growth across the company. Prior to Asbury, David served in the US Army, served as Chief Operating Officer at RLJ McLarty Landers, and at various automotive retail companies including Group 1 Automotive and Penske Automotive Group.

Michael Welch (Senior VP & Chief Financial Officer): Mr. Welch joined Asbury in August 2021 after holding the position of VP and Corporate Controller at Group 1 Automotive, Inc. “$GPI” since June 2019. From June 2000 until June 2019, Mr. Welch held various high-ranking positions with Group 1 Automotive, where he gained experience in treasury, financial reporting, financial planning, and analysis. Mr. Welch hols a BBA from Oklahoma Baptist University and is a CPA in the State of Texas.

Jed Milstein (Senior VP & Chief HR Officer): Mr. Milstein joined Asbury in July 2016 from Americold where he was also the Chief HR Officer. His HR experience includes specialist, generalist and shared services roles in companies spanning the retail, data, logistics, healthcare, and manufacturing industries. Earlier in his career, Mr. Milstein served as a Deputy Attorney General for the State of New Jersey prior to joining the labor and employment law practice at Carpenter, Bennett and Morrissey in Newark, New Jersey. Mr. Milstein holds a JD from George Washington University Law School and a BBA from the University of Michigan.

As you can see, Asbury’s highest level management officers all have rich histories in their respective fields, and have experience in the auto industry, with some of Asbury’s largest competitors (as you will see in the next section).

Competitors:

In order to undergo the comparable analysis, we need to get an idea of their closest competitors. These competitors must operate in the same space, operate in similar geographies, be of similar market cap, and have valid financial ratios. Using this criterion, I came up with the following.

$AN – AutoNation: AutoNation, Inc. is an automotive retailer in the USA that operates in three segments: Domestic, Import, and Premium Luxury. AutoNation offers a range of new and used vehicles; parts & services, repair & maintenance, and wholesale parts/services. The company also provides automotive finance and insurance products (similarly to Asbury). AutoNation owns and operates 315 new vehicle franchises, 74 AutoNation-branded collision centers, 5 AutoNation USA used vehicle stores, 4 AutoNation-branded automotive auction operations, and 3 parts distribution centers.
$GPI – Group 1 Automotive: Group 1 Automotive operates in the automotive retail industry, selling new and used cars, light trucks, and vehicle parts, as well as service and insurance products. Group 1 operates in 15 US states; 33 towns in the United Kingdom; and 3 states in Brazil. Group 1 owns and operates 190 automotive dealerships, 247 franchises, and 48 collision centers that offer 33 brands of automobiles.
$LAD – Lithia Motors Inc.: Lithia Motors is an American automotive retailer that operates through three segments: Domestic, Import, and Luxury. It offers new and used vehicles; vehicle financing services; insurance contracts; automotive repair & maintenance services, as well as vehicle bodies and parts. Lithia operates 210 stores and offers their products online through 200 websites.
$PAG – Penske Auto Group: Penske Auto Group is a diversified transportation services company. The company operates through four segments: Retail Automotive, Retail Commercial Truck, Other, and Non-Automotive Investments. It operates dealerships, engaging in the sale of new and used motor vehicles, collision repair services, finance and insurance products, aftermarket products, and wholesale of parts. It also operates a heavy and medium duty truck dealership, which offers a range of used trucks, and maintenance/repair services. Penske operates 304 retail automotive franchises, including 142 American franchises,162 International Franchises, 17 used vehicle supercenters (US/UK); and 25 commercial truck dealerships (US/CAN).

Financial Information:

Yearly Financial Performance (Good): In 2020, Asbury was able to increase their used vehicle revenues by 2%, increase their gross profits by 5%, increase their operating profit by 14%, their income (pre-tax) by 39%, their net income by 38%, and their EPS by 38%. All of these metrics are very important metrics when valuing a company based on their financials, and results in the conclusion that 2020’s financial performance was great.
Yearly Financial Performance (Bad): In 2020, Asbury’s revenues from new vehicles decreased by 2%, parts and services decreased by 1%, finance and insurance decreased 3%. These factors led to an overall decrease in Asbury’s revenues by 1%. Overall, there was not a lot of bad things to say about their 2020 financial performance.
Q3 2021 Financial Performance (Good): In Q3 2021, Asbury was able to grow their revenues by 30% (from Q3 2020 (YoY)), while limiting their COGS growth rate to 27.5% which helped them to obtain a higher gross margin. On the topic of gross profit, Asbury was able to grow their gross profits by 43%, which led to an increase in income from operations of 69%, and an increase in net income (after-tax) of 53% (52% increase in EPS). Overall, the Q3 2021 report was great, and signifies that Asbury is on track to surpass their goal of 20% CAGR.
Q3 2021 Financial Performance (Bad): Asbury had very little to talk about in terms of bad figures in their earnings. However, in Q3 2021, Asbury’s used vehicle wholesale revenues decreased by 11%, their SG&A costs increased by 30% (mainly due to the increase in personnel from acquisitions), and their long-term debt increased by 14% (which isn’t worrying due to acquisitions and a high ROD). Furthermore, their % of sales from their parts & service, and Financial & Insurance segments decreased (which is not a favourable trend, as they yield the highest gross margins in these 2 segments).

Investment Valuation:

Comparable Analyses: (Spreadsheet found at the end of this analysis)

By comparing Asbury’s financial ratios to that of their publicly listed competition (listed above in the “competitors” section) I found the following:

P/E Ratio:

Based off of Asbury’s Price to Earnings Ratio in comparison to their competitors, $ABG stock should be valued at $186.28/share, which would imply a share price increase of 11%, which is very reasonable.

PEG Ratio:

Asbury’s PEG ratio (compared to their counterparts) indicates that the ABG stock should have a fair value of $167.87/share, which would imply their stock is currently at it’s fair value. This comparable reflects a slightly different story than the P/E multiple, however, they both show that ABG has good value.

EV/EBITDA Ratio:

Asbury’s EV/EBITDA ratio indicates that their fair value is $164.81/share, which would translate into a downside risk of 2%. This contradicts the other 2 comparable analyses, and implies that ABG is slightly overvalued compared to their competitors

Comparable Valuation:

Due to the slight variability between comparable analyses, I decided to take average the 3 comparable results. By doing this I arrived at a final comparable valuation of $173, which implies an upside potential of 3%

DCF: (Visualization found at the end of this analysis)

By inputting the necessary data into my DCF model, I arrived at a fair valuation of $ABG stock of $464/share, which implies an upside potential of 175%.

Overall Valuation:

In order to provide simplicity, I wanted to come to one final, all-encompassing valuation for the $ABG stock. I did this through taking the average valuation of the Average Comparable, and the DCF model. By doing this I arrived at a price target for the $ABG stock of $318.24/share, which implies an upside of 90%.

Investment Plan:

My plan for an investment in the $ABG stock would go as follows:

Enter into a position below the fair value, preferably at/below $170/share.
Hold long-term (1-3 years)
Re-evaluate the position as new data is released (especially their financial reports to see if they continue their growth, or if their growth starts to fall short of expectations).