Investment In Proprietary Technology Will Maintain Stable Net Margins Amid Economic Headwinds

Key Takeaways

• Eagers' transformation and technology investments boost employee productivity and help maintain stable margins, supporting earnings growth amid economic challenges.
  
• Strategic property acquisitions and efficient inventory management enhance financial stability and cost efficiency, positioning Eagers for substantial revenue and profit growth.
  
• Increased corporate debt and reduced gross profit margins, alongside competitive pressures and regional challenges, raise concerns about Eagers Automotive's ability to maintain profitability and sales performance.

Catalysts

Owns and operates motor vehicle dealerships in Australia and New Zealand.

• Eagers Automotive's multiyear business transformation and investment in proprietary technology have resulted in productivity per employee reaching all-time highs. This positions the company to maintain stable net margins, even in economic headwinds, and benefit earnings growth.
  
• The company's strategic property acquisitions, totaling an increase of $241 million in 2024, enhance financial stability and provide a robust asset base for future growth, potentially increasing revenue through expanding dealership points.
  
• Efficient inventory management, maintaining an industry-beating 54 days of supply at year-end 2024, suggests a capacity for improved cost efficiency and reduced interest expenses, positively impacting net profit margins and earnings.
  
• Eagers is set to capitalize on scale through expanding its retail joint venture and independent used business, easyauto123. This growth is anticipated to drive revenue with significant earnings potential in 2025 and beyond as acquisition integrations deepen.
  
• The strong market share growth to 11.5% and demand exceeding supply with a substantial order bank at 5x pre-COVID levels, indicates a capacity for robust revenue growth, driven by high quality partnerships and popular product offerings.

Eagers Automotive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eagers Automotive's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 2.3% in 3 years time.
• Analysts expect earnings to reach A$310.0 million (and earnings per share of A$1.2) by about April 2028, up from A$205.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$356.4 million in earnings, and the most bearish expecting A$266.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, down from 19.1x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 18.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.09%, as per the Simply Wall St company report.

Eagers Automotive Future Earnings Per Share Growth

Risks

• Eagers Automotive reported that its 2024 full-year results were below the record performance of 2023, which could indicate that sustaining high growth might be challenging in fluctuating market conditions, impacting both revenue and earnings.
  
• The company's gross profit margins reduced compared to 2023, which, even though managed well, suggests potential vulnerability in maintaining profitability, affecting net margins.
  
• The significant $21.2 million impairment of New Zealand operations due to economic challenges indicates possible regional risks or vulnerabilities that could strain financial results, potentially impacting net earnings.
  
• An increase in corporate debt from $495 million in June 2024 to $813 million by year-end signals higher leverage, raising concerns about increased financial obligations that may affect future net profit margins amidst changing interest rate environments.
  
• Competitive pressures and market dynamics noted within the industry, like supply chain challenges and franchise-specific demand supply imbalances, could threaten consistent sales performance and profit margins if not managed effectively, particularly affecting revenue projections.
  

Valuation

• The analysts have a consensus price target of A$15.153 for Eagers Automotive based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$19.0, and the most bearish reporting a price target of just A$9.89.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$13.2 billion, earnings will come to A$310.0 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 9.1%.
• Given the current share price of A$15.21, the analyst price target of A$15.15 is 0.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.