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Bull of the Day: Asbury Automotive Group (ABG)

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There’s a good chance you’ve already heard that the automobile sales industry has been very hot lately. Due to many factors - including supply shortages, shipping delays, pent-up demand from the pandemic and the enormous amount of fiscal stimulus boosting customers’ spending power – auto dealers are barely able to keep new and used vehicles on the lot.

Not too long ago, individual auto dealerships were mostly privately held family businesses – and they also tended to be very profitable, especially as those dealers switched from a model that was dependent on sales for revenues to one in which the service and repair department accounts for the lion’s share of the profits.

The National Association of Auto Dealers estimates that the sale of new vehicles makes up 58% of the revenue at the average dealership but just 26% of profits. Used vehicles are a bit better at 31% of sales and 25% of profits. That leaves the repair department with 11% of sales and 49% of profits. It’s a cash cow!

That shift also made auto dealers a much more investible enterprise because the service revenues are much less economically sensitive than sales. You can choose to put off the purchase of another vehicle when times are tight, but you can’t necessarily do the same with repairs and maintenance - if you want to keep driving to work.

National chains like CarMax (KMX - Free Report) and AutoNation (AN - Free Report) are great companies and enjoy a lot of visibility, especially because of their huge advertising budgets. Investors who want a piece of the pie should also consider a smaller and lesser-known dealer group that’s quietly amassing a broad network of dealers in key markets.

Asbury Automotive Group (ABG - Free Report) is headquartered in Duluth GA, but owns dealerships all over the Southeast, from Florida to St. Louis. Through a series of strategic acquisitions – mostly of multi-unit operations - Asbury now operates 91 dealerships and 25 collision repair centers. And they’re very profitable.

With a market capitalization of under $4 billion, Asbury Automotive is going to do almost $10 billion in sales this year.

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Image Source: Zacks Investment Research

 

Do you like the idea of a 0.4X Price/sales ratio? I certainly do.

And the profit picture is even better. Though the current share price around $195 might seem expensive, it’s downright cheap when you consider that the Zacks Consensus Earnings Estimate for 2021 is $22.79/share.

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

That’s a forward P/E Ratio of just 8.7X.

While revenues are anticipated to rise 34.6%, the profit expectations are up 76.7%.

Rising revenues and increasing margins is a tried-and-true recipe for success.

Six full-year upward earnings estimate revisions in the past 30 days earn Asbury Automotive Group a Zacks Rank #1 (Strong Buy). A perfect report card with “A’s” in Value, Growth and Momentum Style Scores round out the picture.

Even better, because they’re generating so much cash right now, even if there were to be a downturn in sales, ABG could take advantage of its aggressive acquisition style and big war chest to pick up lesser-performing competitors on the cheap.

The auto-sales industry is doing very well right now and there a few bad picks in the whole bunch. There’s none better however, than Asbury Automotive Group.
 


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AutoNation, Inc. (AN) - free report >>

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Asbury Automotive Group, Inc. (ABG) - free report >>