Group 1 Auto Feels U.S. Drag

Group 1 Automotive, Inc. (GPI - Snapshot Report) has generated most of its recent growth through acquisitions. The recently reduced interest rates will provide further growth for the company. GPI aggressively manages its costs and has dealerships with above-average profitability. Further, the company has a strong geographical presence.

However, a difficult car sales environment is affecting revenues. The company anticipates a modest 1-2% growth in revenues for 2008. Thus, we rate the stock a Hold with a six-month target price of $24.50.

Group 1’s strategy for success is founded on decentralized operations, industry-leading customer service, disciplined acquisition growth, and geographic and brand diversity. At the same time, integration and consolidation provide cost savings and revenue synergies.

GPI expects the 14 franchises it acquired in 2007 to generate annual revenues of approximately $702.4 million in 2008. The company plans to dispose of underperforming stores. Group 1 has set a target of acquiring franchises with approximately $300 million annual revenues in 2008. In May, GPI acquired Tate BMW/MINI in Annapolis, which is expected to generate $73.0 million in estimated annual revenues.

Currently, the company focuses on improving same-store sales and higher-margin business such as parts and service as well as used vehicles. The management expects an EPS growth of 15%.

Shares of Group 1 are trading at a forward P/E multiple of 6.9x 2008 EPS estimate of $3.26. Standard & Poor’s Ratings Services lowered Group 1 Automotive, Inc.’s corporate credit rating due to challenging North American sales conditions but raised its outlook to Stable from Negative. We believe that with weak same-store sales data, yet decentralized operations and excellent geographic reach, the stock should trade at a multiple of 7.5x 2008 EPS.

Read the full analyst report on GPI