Expanding TCA Offerings And Tekion Efficiencies Will Drive Future Earnings Growth

Key Takeaways

• Cost-cutting measures and Tekion implementation are expected to improve margins and enhance operational efficiencies.
  
• Expansion of TCA offerings and growth in parts and service could significantly boost earnings.
  
• Exposure to new vehicle volume declines and stop sale orders could pressure Asbury's revenue, while service reliance and system rollout costs also pose risks.

Catalysts

Operates as an automotive retailer in the United States.

• Asbury Automotive Group is expecting increased incentives from Stellantis, potentially resolving inventory challenges and positively impacting new vehicle revenues.
  
• The company has implemented cost-cutting measures, as seen in improving SG&A as a percentage of gross profit, which could enhance net margins.
  
• The growth in parts and service business, coupled with the expected increase in warranty work due to recent stop sales, suggests a positive impact on future gross profit and overall earnings.
  
• Asbury plans to expand TCA offerings to additional markets, which is projected to contribute significantly to pretax income and thus boost earnings over the next few years.
  
• The implementation of Tekion across their network is anticipated to improve efficiencies and lower SG&A costs in the medium to long term, potentially enhancing operating margins.

Asbury Automotive Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Asbury Automotive Group's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 3.6% in 3 years time.
• Analysts expect earnings to reach $778.7 million (and earnings per share of $42.97) by about November 2027, up from $357.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.7x on those 2027 earnings, down from 14.5x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.3x.
• Analysts expect the number of shares outstanding to decline by 2.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.78%, as per the Simply Wall St company report.

Asbury Automotive Group Future Earnings Per Share Growth

Risks

• Asbury's exposure to Stellantis, with year-over-year new vehicle volume declines of 30% and a gross profit per vehicle down 53%, presents a significant risk to their revenue and profitability if these headwinds persist.
  
• The impact of hurricanes leading to temporary store closures and reduced customer traffic, along with damage to dealership assets, could negatively affect revenue, net margins, and overall earnings.
  
• Ongoing and new stop sale orders on profitable models from Toyota, Lexus, BMW, and Honda could continue to impact new vehicle sales and gross profits, thereby affecting total revenue and earnings.
  
• An increased reliance on high-margin customer pay services is seen as beneficial, but any slowdown or shift in this segment could reduce overall gross margins and revenue.
  
• Potential negative impacts from Tekion system rollout costs and deferred revenue headwinds associated with Total Care Auto (TCA) could pressure short-term financials, impacting net income and overall operating margins.

Valuation

• The analysts have a consensus price target of $258.12 for Asbury Automotive Group 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 $305.0, and the most bearish reporting a price target of just $220.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $21.5 billion, earnings will come to $778.7 million, and it would be trading on a PE ratio of 7.7x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $264.79, the analyst's price target of $258.12 is 2.6% 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.