2008 | 2009 | ||||||
Price: | 14.05 | EPS | |||||
Shares Out. (in M): | 0 | P/E | |||||
Market Cap (in $M): | 448 | P/FCF | |||||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV ($): | 0 | TEV/EBIT |
So consumer, retail and automotive exposure may not quite be what most people are looking to add to their current portfolio but Asbury Automotive (ABG) is a terrific value investment. ABG which owns auto dealers, has the potential to more than double and pays a 6.4% yield while you wait. It has a market capitalization of approximately $450m (32 million shares x $14), long-term debt of $475m and cash of roughly $50m for a TEV of $875m. The stock currently trades at just 7.5x consensus earnings estimates. It arguably trades at well below 6x EPS in a normalized environment. They key to the value of ABG is the resiliency of its business model. Even in a recession, and I assume we are in one, ABG will generate decent earnings, pay its dividend and increase its long-term earnings potential through attractive acquisitions.
Business Model
Years ago the Company made a strategic decision to focus on foreign and luxury brands. This was a brilliant move that explains a great deal of why ABG’s earnings can hold up even in a weak market. Over 80% of ABG’s new car sales are luxury or mid-line imports. Investors in this space closely track
The Company’s strong parts & service and finance operations make it more resistant to economic downturns. While 85% revenues are generated by car sales, parts and services and financing generate almost 60% of gross margin. In 2007, the revenue and gross margin contribution were:
|
Revenue |
% of Total |
Gross Profit |
% of Total |
Gross Margin |
New Car |
$3,223 |
56% |
$237 |
27% |
8% |
Used Car |
1,114 |
20% |
127 |
14% |
11% |
Fleet |
512 |
9% |
0 |
0% |
0% |
Parts |
703 |
12% |
363 |
41% |
52% |
Finance |
162 |
3% |
162 |
18% |
100% |
Total |
$5,713 |
100% |
$889 |
100% |
16% |
Parts & services are not cyclical like car sales. If you need your car fixed, you get it fixed. If anything, consumers will rely more on servicing to defer having to buy another car during tough times. The Company anticipated growing this area of the business during 2008. While financing volume is dependent on car sales, it is a very lucrative business for ABG with no risk. ABG simply collects a fee from third party providers- the Company has absolutely no balance sheet risk associated with its financing revenue. By selling both new and used cars, the Company also makes itself less volatile during tough times. Used car sales have typically shown less cyclicality than new cars during economic stress. But if manufacturers become aggressive with incentives in response to the downturn (making new cars relatively more attractive than used cars), the benefit to new car sales will help offset the loss in used car sales.
While SAAR will no doubt decline this year (though the brands which ABG owns will fare relatively better), ABG should earn $1.40-$1.50 even in a 14m
Year |
|
2007 |
16.3 |
2006 |
16.6 |
2005 |
17.0 |
2004 |
17.7 |
2003 |
17.5 |
2002 |
17.9 |
2001 |
16.2 |
2000 |
15.7 |
1999 |
17.9 |
1998 |
17.0 |
1997 |
16.1 |
1996 |
14.8 |
1995 |
15.9 |
1994 |
15.2 |
1993 |
14.7 |
1992 |
13.5 |
1991 |
11.3 |
1990 |
12.7 |
1989 |
13.3 |
Source: Bloomberg |
In our model, we assume continued market share gains for luxury and foreign (it is hard to imagine this not being the case) but sales declining steeply in every area (this could be conservative if domestic sales really implode). We assume sales compensation is variable (commission determines much of these numbers) and that the Company will cut certain S, G & A areas such as advertising and outside services with a slight decrease in personal, with other segments growing with inflation (rent, utilities, etc.). Financing revenues decline with fewer cars sold while parts & services remain steady. Based on these assumptions, we get $1.47 in EPS at a 14m SAAR and $1.82 at a 15m
So on trough earnings, the Company trades at less than 10x EPS. The stock is cheap in an almost worst case scenario. Even taking a recession as given, the Company may still earn more than $1.50 . Management is currently guiding to $1.80 to $2.00. While we think the low end maybe more likely based on current trends, that is still a very nice earnings number.
Dividends
The Company’s dividend is safe even in a deep recession that lasts through 2009. ABG currently pays a $.90 dividend for a yield of approximately 6.4%. Under its bond indentures, the Company can pay approximately 50% its earnings in dividends. However, it also has a $20m carve out for dividends and share repurchases, which increases what it can pay out in dividends. The Company has approximately 32m shares outstanding. So if even if earns $1.50 for 2 years, the basket will enable it make up the difference and keep its dividend. That’s a nice yield while you wait for the story to play out.
Catalysts
The stock is priced for a recession. So the bar is set very low. It is hard to see much downside from here (perhaps back to its 52 week low of just under $12) and the upside is considerable. The stock traded at $30 in April 2007. Even then it was not expensive. As investors look for stocks that anticipate an economic recovery, ABG should bounce as long as its earnings are not disastrous. While its not a specific event catalyst, I don’t think it will take much to get ABG moving.
Risks
The most obvious risk is a macro economic melt down on a scale beyond what I have used in my model as a recession. While possible, I think it is unlikely. Other risks include:
§ Automotive finance scarce. ABG did have weaker earnings in the second half of 2007 as finance for subprime buyers for its used cars became less available. While this is an issue it primarily impacts used car sales and only a minority of its buyers are sub prime. Our due diligence indicates that financing for cars remains reasonably stable as the loans are considered safer than most (they are collateralized, the collateral is easily sold and most people are very reluctant to default on a car loan as they often need their car to get to work).
§
§ 1Q earnings could disappoint. It is a cyclically weak quarter and indications are the macro environment remains rough. So maybe able to enter a lower prices in the not too distant future.
Conclusion
In normalized conditions, ABG can earn over $2 per share (it earned $2.09 in 2007). Over time, its earnings potential has grown both through organic growth and accretive acquisitions. Management of ABG is very strong and they are extremely well regarded within the industry. Its dealerships are very valuable. They are great brands (Honda,
What is the stock worth in the long-run? Penske Automotive (PAG) has indicated in meeting that it looked at buying ABG for north of $20 (so 40% or more upside from the current price). People I have spoken with in the industry believe the break-up value (simply selling off all its dealerships) of the Company, even in this distressed environment, is also north of $20. I think ABG is worth closer to $40 in the long-term. The Company’s real earnings power is in the $2.50 and higher range. At a 15x multiple you get a stock price of $37.50. That is great return even if it takes 2-3 years and along the way you are getting a great dividend stream.
Subject | Private market value |
Entry | 04/24/2008 05:47 PM |
Member | grant387 |
Some questions. What have you found to be private market value of dealership groups on a price/sales basis? Any balance sheet issues make a P/S multiple not relevant at ABG? What has been the structure of their rollups? Do they own the dirt? Have they done sale/leasebacks? Any relative value comments in regards to SAH, AN, etc.? Nice succinct writeup - thanks for posting it. | |
Subject | RE: Private market value |
Entry | 04/25/2008 03:23 PM |
Member | bedrock346 |
Some Answers: 1) They target acquiring $200m in revenue per year but last year acquired $350m in revenue. Price / sales varies based upon the brands and business mix of the dealers they are acquiring (see answer #2). Management analyzes acquisitions more on an EBITDA and EBIT multiple basis. 2) I don’t really like using the price to sales multiple for this situation. More for income statement reasons than balance sheet reasons. They generate lot revenues from car sales but most of the margins from servicing and financing. They also have big fleet sales that have no contribution. So not all sales are equal. I prefer P/E and TEV / EBITDA. I focused on P/E in the write-up because that is the ratio analysts have tended to focus on so it really trades on that. 3) They own the dirt but typically do sale leasebacks. They use sale lease backs a lot to reduce capex and acquisition cash costs. 4) The whole sector trades at cheap multiple. But I think you really want to own the companies with high foreign & luxury exposure. They will be the relative winners. So prefer ABG to SAH and AN. PAG also has a great brand mix but it is much more expensive than ABG on a multiple basis (13x v. 8x est p/e). So I much prefer ABG to PAG on a relative valuation basis. | |
Subject | buyout |
Entry | 04/25/2008 07:57 PM |
Member | armand440 |
thank you for a good write-up. you list a buyout as a possible catalyst... who do you think are likely buyers? i imagine that ripplewood shopped the company before they sold their block, and it is my understanding that the OEMs vetoed an acquisition by Penske and Autonation. | |
Subject | RE: buyout |
Entry | 04/25/2008 09:17 PM |
Member | bedrock346 |
OEMs made it more difficult, not impossoble. I think I said a buyout was unlikely, but Penske has admitted bidding on the company around $20. I think this is an earnings validation play with a nice current yield while you wait. | |
Subject | Questions |
Entry | 04/26/2008 11:38 AM |
Member | david101 |
Bedrock, Kind of a contrarian idea. Have some questions: 1. Parts & Service - There are plenty of cheaper substitutes to having your car serviced at a dealership. What would keep customers from doing that in a recession? 2. Financing - Do you have any sense as to the current OEM financing landscape? Since 2/3 of their sales are financed, what happens in this arena can influence car sales. As I understand it, ABG assumes no liability on the loans and just collects an origination fee. But if the ultimate lender is having problems securitizing auto loans, that could have a trickle down effect on the types of lending available. Thanks. David | |
Subject | Response to David |
Entry | 04/28/2008 09:43 AM |
Member | bedrock346 |
1) A lot of the servicing of the car has to be done at a factory authorized dealer (especially true for leases). That creates a stickier customer. I think parts and service down trading is more an issue for used car dealerships. 2) The company maintains that to date customer financing has not been a problem. Also rememnber, with the vast majority of their brands foreign, they are in far better shape. That said a continuing meltdown of the financial sector can't be positive though not necessarily a disaster. | |
Subject | Barrons |
Entry | 04/28/2008 09:45 AM |
Member | bedrock346 |
I just wanted to point out that there was a very positive article in Barrons over the weekend, which may account for some of the stock's strength today. | |
Subject | Current perspective |
Entry | 11/11/2008 11:13 AM |
Member | maggie1002 |
Bedrock, given the situation confronting the OEMs, the intensifying woes for the economy/credit (all well-documented obviously), suspension of the dividend, current stock price, wonder if you can update us with your current perspective. Many thanks in advance. |