Urbanization And EV Shift Will Erode Aftersales Revenues

Key Takeaways

• Shifts toward shared mobility, electric vehicles, and digital sales channels threaten Eagers' traditional dealership-based business model and high-margin revenue streams.
  
• Rising operational costs, changing OEM relationships, and weaker vehicle demand increase pressure on margins, asset efficiency, and overall earnings stability.
  
• Sustained growth, operational efficiency, EV leadership, scalable used-car profits, and successful acquisitions position Eagers Automotive for enduring competitive advantage and future earnings expansion.

Catalysts

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

• The ongoing shift towards shared mobility models and increased urbanization is likely to reduce private car ownership in Australia and New Zealand over time, directly shrinking the addressable customer base for Eagers Automotive and driving long-term revenue slowdown.
  
• Accelerating electric vehicle adoption threatens the company's high-margin aftersales revenue streams, as EVs require less maintenance and servicing than internal combustion engine vehicles, which will likely erode net margins as the sales mix shifts further towards plug-in models.
  
• Heavy investments in physical dealership infrastructure and property, despite trends in digital retailing and direct OEM sales channels, risk leaving Eagers with underutilized assets and lower returns on capital employed, pressuring both earnings and asset efficiency in the long run.
  
• Dependence on franchise agreements with OEMs leaves the company vulnerable to margin compression, especially as some manufacturers increase direct-to-consumer sales or adopt agency models, reducing Eagers' bargaining power, brand diversity and ultimately compressing net profit margins.
  
• Persistent inflation, higher interest rates, and tighter regulatory emission controls are expected to dampen new vehicle demand and may prompt automakers to rationalize distribution networks, both of which will contribute to slower top-line growth for Eagers and increased operating risk across business cycles.

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 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.7% today to 2.3% in 3 years time.
• The bearish analysts expect earnings to reach A$333.3 million (and earnings per share of A$1.26) by about September 2028, up from A$207.8 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 14.4x on those 2028 earnings, down from 33.3x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 26.7x.
• 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 8.81%, as per the Simply Wall St company report.

Eagers Automotive Future Earnings Per Share Growth

Risks

• Strong long-term organic and acquisitive growth has significantly increased Eagers Automotive's revenue and market share, with the company now controlling 14% of the Australian new car market and maintaining robust sales momentum, which is likely to support sustained top line revenue growth.
  
• Operational scale and consistent execution of the Next100 Strategy are driving record productivity and ongoing cost efficiencies, resulting in record low costs as a percentage of sales and positioning Eagers Automotive for potential margin expansion and higher net earnings over time.
  
• Eagers Automotive's leadership in electric and plug-in vehicles, delivering 34% of all plug-in sales in Australia, and its relationships with high-quality OEMs, provide strong exposure to the accelerating shift toward electric mobility, which could boost future revenues and defend against industry disruption.
  
• The easyauto123 used car business is delivering rapid profit growth, outperforming global benchmarks, and benefits from proprietary sourcing advantages combined with advanced technology investments, indicating a scalable high-margin revenue stream that can enhance overall earnings and profitability into the long term.
  
• Ongoing industry consolidation and Eagers Automotive's proven ability to integrate acquisitions quickly and lift their performance to core group returns provide a durable competitive advantage, supporting higher average margins and additional accretive growth opportunities that may positively impact net margins and earnings.

Valuation

• The assumed bearish price target for Eagers Automotive is A$14.43, which represents two standard deviations below the consensus price target of A$23.38. 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$28.62, and the most bearish reporting a price target of just A$14.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$14.3 billion, earnings will come to A$333.3 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of A$26.8, the bearish analyst price target of A$14.43 is 85.7% 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.