Digital Disruption And EV Adoption Will Deter Revenue Streams

Key Takeaways

• Rising EV adoption and digital sales threaten Asbury's core dealership model, risking revenue streams and reducing the value of physical locations.
  
• Heavy reliance on acquisitions and shrinking market demand due to demographic shifts expose Asbury to ongoing margin and earnings pressure.
  
• Strategic acquisitions, digital investments, and parts and service growth position Asbury for margin stability, operational efficiency, and stronger profit resilience across economic cycles.

Catalysts

Operates as an automotive retailer in the United States.

• Rapid industry adoption of electric vehicles and increasing reliance on direct-to-consumer sales models by automakers are expected to sharply reduce demand for traditional dealership services, undermining Asbury's core new and used vehicle revenue streams and placing long-term pressure on revenue growth.
  
• Accelerated digitalization of car buying, combined with disruptive online platforms, is set to diminish the relevance and profitability of brick-and-mortar dealerships, leaving Asbury vulnerable to market share erosion and a decline in customer acquisition, ultimately impairing top-line revenue and margins.
  
• Continued dependence on large-scale acquisitions to drive growth increases integration risk and financial leverage, raising the probability of higher interest expenses and lower net margins, especially as debt levels remain elevated following the Herb Chambers acquisition.
  
• As demographic trends shift towards urbanization and younger generations show declining car ownership rates, the total addressable market for traditional dealerships shrinks further, posing a structural headwind to Asbury's long-term sales volumes and earnings.
  
• Growth in EVs is anticipated to reduce aftermarket service and repair requirements, threatening Asbury's high-margin parts and service revenues and putting downward pressure on operating margins and stable cash flows for the foreseeable future.

Asbury Automotive Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Asbury Automotive Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Asbury Automotive Group's revenue will grow by 4.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach $684.7 million (and earnings per share of $38.75) by about August 2028, up from $540.0 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 7.7x on those 2028 earnings, down from 8.1x today. This future PE is lower than the current PE for the US Specialty Retail industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 1.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.92%, as per the Simply Wall St company report.

Asbury Automotive Group Future Earnings Per Share Growth

Risks

• The company's strategic acquisition of Herb Chambers, with its high mix of luxury brands and stable, recession-resistant New England markets, provides meaningful geographic diversification and margin defensiveness, which could support revenue growth and stabilize overall operating margins in downturns.
  
• Persistent, high-growth in parts and service gross profit driven by an aging vehicle fleet and increasing vehicle complexity-along with fixed absorption rates above 100%-positions Asbury to benefit from long-term secular trends, thereby enhancing both revenue streams and earnings stability.
  
• Significant ongoing investment in digital retail solutions like Clicklane and the implementation of the Tekion DMS platform are expected to further improve operational efficiency, lower SG&A as a percentage of gross profit, and support higher-margin online sales, which may positively impact net margins and future profitability.
  
• Asbury's disciplined focus on portfolio optimization through active divestiture of underperforming stores and redeployment of capital towards high-return acquisitions demonstrates prudent capital allocation, which could strengthen the balance sheet and support stronger earnings per share.
  
• The constrained supply environment in the used car market, which is expected to ease by 2026 with increased off-lease vehicle availability, supports gross profit prioritization and could drive higher used unit sales volumes and profitability, bolstering both revenue and net earnings over the medium term.

Valuation

• The assumed bearish price target for Asbury Automotive Group is $215.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Asbury Automotive Group'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 $335.0, and the most bearish reporting a price target of just $215.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $19.7 billion, earnings will come to $684.7 million, and it would be trading on a PE ratio of 7.7x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $222.28, the bearish analyst price target of $215.0 is 3.4% lower. The relatively low difference between the current share price and the analyst bearish 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.