Asbury Automotive: Strength In Maintenance Can Lift Shares

Core Viewpoint - Asbury Automotive Group has experienced mixed performance over the past year, with a 10% increase in stock price, and analysts are evaluating whether the current underperformance is justified or if there remains an opportunity for returns exceeding 15% [2] Financial Performance - In Q1, Asbury reported earnings of $7.21 per share on revenue of $4.2 billion, reflecting a 17% year-over-year revenue increase, driven by mergers and acquisitions [5] - Analysts project the company will earn $29.73 per share for the full year, surpassing the long-term estimate of $19 per share, leading to a fair value estimate of $260 [5] - Gross profit for the company was $750 million, an 8% increase, although gross margins declined by 158 basis points to 17.9% [6] Market Dynamics - Vehicle sales have historically not been the primary driver of the auto dealer business; maintenance and financing contribute significantly more to gross profit [7] - New vehicles accounted for 49% of revenue in Q1, generating $2.06 billion, but gross profit from new vehicles fell by 9% to $163 million due to margin contraction [7] - Used vehicles represented 32% of revenue at $1.36 billion, with gross profit declining by 7% to $72 million despite a 20% revenue increase [10] Inventory and Sales Trends - Asbury's new vehicle inventory has normalized to 54 days, up from 30 days a year ago, indicating a return to more typical market conditions [8] - Same-store new vehicle sales decreased by 1%, while revenue growth was primarily driven by M&A activities [7] - Maintenance services generated $590 million in revenue, accounting for 14% of total revenue and 45% of gross profit, with margins expanding to 56.6% [10] Cash Flow and Shareholder Returns - The company generated $209 million in operating cash flow and $183 million in free cash flow, with a share count reduction of 6% due to $50 million in share repurchases [10] - Asbury's leverage ratio stands at 2.6x, within its target range, and the company has a well-structured debt profile with no significant maturities until 2026 [11] Future Outlook - The company is expected to earn approximately $30 per share this year, trading at 8 times earnings, which is considered an attractive long-term valuation [13] - With ongoing growth in maintenance and stabilization in used car sales, Asbury is positioned for potential share price appreciation towards $300, based on projected earnings multiples [18]