Tekion Rollout And Herb Chambers Acquisition Will Improve Operations

Key Takeaways

• Implementing Tekion could enhance productivity, customer experience, and net margins by reducing costs and improving SG&A efficiency.
  
• Strategic expansion and parts/service growth position Asbury for revenue growth, with focus on deleveraging strengthening free cash flow.
  
• Tariffs and uncertain OEM pricing could pressure sales and margins, while acquisition risks and weakening used vehicle sales may strain financial performance.

Catalysts

Operates as an automotive retailer in the United States.

• Asbury Automotive Group is implementing Tekion, a new dealership management system, which has shown early signs of improved productivity and customer experience. This rollout could lead to cost savings by reducing software and integration expenses, thereby enhancing SG&A efficiency and potentially boosting net margins.
  
• The company's expansion through the pending acquisition of Herb Chambers Automotive Group in the Boston area is expected to diversify its brand portfolio and enhance long-term growth prospects. This strategic move could bolster future revenue, especially given the resilience of the luxury market in varied economic cycles.
  
• Asbury's parts and service segment has demonstrated consistent growth, with a near 100% increase in customer pay gross profit over a decade. The continually aging car population and increasing vehicle complexity position the company to capture future service growth, driving revenue and boosting gross profit margins.
  
• Asbury's strategic focus on deleveraging post-acquisition through targeted divestitures and disciplined capital allocation could reduce financial leverage, strengthening earnings and free cash flow over the next 18 to 24 months.
  
• With a high percentage of new vehicles produced in America (56%), Asbury is comparatively insulated from tariff impacts, which could prevent adverse effects on pricing and protect gross profit margins in a tariff-volatile environment.

Asbury Automotive Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Asbury Automotive Group's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 3.9% in 3 years time.
• Analysts expect earnings to reach $824.2 million (and earnings per share of $46.91) by about April 2028, up from $415.3 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 7.4x on those 2028 earnings, down from 10.2x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 2.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.43%, as per the Simply Wall St company report.

Asbury Automotive Group Future Earnings Per Share Growth

Risks

• Tariff policies present significant uncertainties, and the impact on OEM partners’ pricing decisions remains unclear, which could negatively affect future vehicle sales volumes and gross profit margins.
  
• The pending acquisition of the Herb Chambers Automotive Group will increase leverage, and any challenges in integrating this acquisition could put pressure on net income and debt servicing metrics.
  
• Used vehicle unit volume was down 8% year-over-year, indicating potential saturation or weakening in this segment, which could impact overall revenue growth and profitability.
  
• Higher risk of increased SG&A costs if tariffs persist, possibly eroding net margins if sales volumes decline without corresponding cost adjustments.
  
• Fluctuations in fixed operations revenue, partly due to weather disruptions and changes in consumer behavior regarding service timing, may result in inconsistent revenue from parts and services.
  

Valuation

• The analysts have a consensus price target of $252.875 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 $297.0, and the most bearish reporting a price target of just $200.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $21.2 billion, earnings will come to $824.2 million, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of $216.26, the analyst price target of $252.88 is 14.5% higher.
  
• 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.