Legacy Dealership Model Will Falter While EV Transition Offers Glimmer

Key Takeaways

• The rise of electric vehicles and direct-to-consumer sales is set to undermine Eagers Automotive's dealership model and reduce its core revenue streams.
  
• Urbanization, shared mobility trends, and tighter regulations are expected to shrink the company's addressable market and compress profit margins over time.
  
• Diversified growth, industry consolidation, and technology-driven efficiencies position the company for resilient long-term earnings and enhanced margins despite sector challenges.

Catalysts

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

• The rapid acceleration of electric vehicle (EV) adoption, combined with a declining share of internal combustion engine (ICE) sales, threatens Eagers Automotive's core business as aftersales and servicing demand for traditional vehicles contracts-this secular shift is likely to erode the company's primary revenue base and compress net margins over time.
  
• The growing prevalence of direct-to-consumer (D2C) sales by automotive manufacturers is expected to bypass traditional dealerships, undermining Eagers' core franchise model, potentially resulting in lower gross margins and reduced earnings power as manufacturer relationships and control over inventory weaken.
  
• Long-term urbanization trends and increasing adoption of shared mobility and car subscription services may lead to declining rates of private vehicle ownership in Australia and New Zealand, shrinking Eagers' addressable market and creating persistent headwinds for volume growth and top-line revenue.
  
• Persistently high exposure to ICE sales, with only a gradual rollout of EV infrastructure and mixed performance in new energy ventures, leaves Eagers vulnerable to competitive displacement and market share loss as the industry transitions, heightening the risk of revenue stagnation and net margin erosion.
  
• Increased regulatory scrutiny on vehicle emissions, coupled with intensifying online competition and digital retail disruption, is likely to impose higher compliance costs and drive margin compression for specialty dealership groups like Eagers Automotive, thereby weighing on long-term profitability and return on equity.

Eagers Automotive Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Eagers Automotive compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Eagers Automotive's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.8% today to 2.2% in 3 years time.
• The bearish analysts expect earnings to reach A$279.8 million (and earnings per share of A$1.17) by about August 2028, up from A$205.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, down from 25.1x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 21.9x.
• 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 9.19%, as per the Simply Wall St company report.

Eagers Automotive Future Earnings Per Share Growth

Risks

• Continued population growth and urbanisation in Australia and New Zealand are likely to drive structural increases in vehicle demand and dealership services, supporting long-term revenue growth for Eagers Automotive.
  
• Eagers Automotive's demonstrated ability to consolidate the dealership market and execute successful acquisitions positions it to benefit from industry rationalisation and increasing scale, potentially enhancing net margins and earnings over time.
  
• Accelerated investment in proprietary technology and process optimisation has driven historically high productivity per employee and cost efficiencies, which could help maintain or increase operating profit margins, even amid sector headwinds.
  
• Expansion into electric vehicles, hybrids, aftersales and finance services, and the scaling of the easyauto123 used business, diversify revenue streams and reduce earnings cyclicality, supporting resilient and potentially higher long-term earnings.
  
• The company's strong balance sheet, ample liquidity, substantial property assets, and disciplined capital management underpin financial flexibility to pursue strategic growth, which may lead to continued improvement in revenue, margins and shareholder returns.

Valuation

• The assumed bearish price target for Eagers Automotive is A$13.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Eagers Automotive's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$20.6, and the most bearish reporting a price target of just A$13.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$13.0 billion, earnings will come to A$279.8 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of A$19.97, the bearish analyst price target of A$13.0 is 53.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.