Rising Vehicle Age And Digital Retailing Will Forge Sustained Momentum

Key Takeaways

• Increased service revenue and parts growth are fueled by aging, complex vehicles and robust customer retention after warranties expire.
  
• Digital retail innovations and disciplined acquisitions are driving operational leverage, higher margins, and long-term earnings growth.
  
• Heavy dependence on traditional dealerships, lagging digital transformation, and exposure to shifting industry trends could undermine growth, margins, and long-term competitiveness.

Catalysts

Operates as an automotive retailer in the United States.

• As the average age and complexity of vehicles on U.S. roads keeps increasing, Asbury’s parts and service business is positioned to capture significant, high-margin growth in service revenue, supported by the company’s consistent decade-long customer pay gross profit expansion and strong customer retention after warranties expire.
  
• The adoption and ongoing enhancement of Asbury’s Clicklane digital retail platform and the rollout of Tekion enterprise software are driving operational efficiencies, lowering overhead and SG&A, improving employee productivity, and enabling enhanced cross-selling and marketing, all of which are likely to lead to sustained net margin expansion and higher EBITDA as sales throughput rises.
  
• Asbury’s proven and disciplined M&A strategy, highlighted by the acquisition of Herb Chambers’ luxury dealerships in the resilient Boston market, is expected to lift average selling prices, expand luxury market exposure, and drive top-line revenue and per-unit gross profit growth, supported by post-acquisition cost synergies.
  
• Strong exposure to both new and certified pre-owned vehicles allows Asbury to benefit from sustained consumer demand for affordable, high-quality transportation options, particularly as new car affordability declines, resulting in higher F&I income and higher overall average profit per vehicle over time.
  
• Industry consolidation and Asbury’s ongoing operational improvements are strengthening its bargaining power with automakers, deepening operational leverage, and allowing the company to achieve record-low SG&A ratios relative to peers, all of which support long-term adjusted earnings per share growth.

Asbury Automotive Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Asbury Automotive Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Asbury Automotive Group's revenue will grow by 7.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.4% today to 3.1% in 3 years time.
• The bullish analysts expect earnings to reach $670.3 million (and earnings per share of $37.0) by about May 2028, up from $415.3 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 bullish analyst cohort, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 10.4x 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 2.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.17%, as per the Simply Wall St company report.

Asbury Automotive Group Future Earnings Per Share Growth

Risks

• Asbury Automotive Group's business model remains heavily reliant on traditional dealership and in-person transactions, while competitors and industry trends increasingly shift towards online vehicle purchasing platforms, potentially leading to long-term market share loss and putting downward pressure on both top-line revenue and margins.
  
• The accelerating adoption of electric vehicles and growth in manufacturers’ direct-to-consumer sales models, such as those employed by Tesla, could bypass franchise dealerships altogether, diminishing Asbury’s relevance and eroding gross profit margins over time as more manufacturers pursue direct sales.
  
• Asbury’s reliance on acquisitions for growth, highlighted by the recent pending purchase of the Herb Chambers Automotive Group, increases the risk of overleveraging the balance sheet and encountering integration challenges, which may lead to inconsistent earnings and margin volatility if market conditions deteriorate or synergies fail to materialize.
  
• Asbury’s digital infrastructure and e-commerce penetration appears limited compared to larger peers, with only 10,500 sales through Clicklane in the first quarter despite rapid digitalization across the industry, which exposes the company to a risk of declining revenues if consumers increasingly migrate to robust digital-first competitors.
  
• The company’s significant exposure to legacy internal combustion engine vehicles in both inventory and service operations risks inventory write-downs, declining service demand, and margin pressure as consumer demand shifts to electric vehicles, challenging net income growth and profitability in the long term.

Valuation

• The assumed bullish price target for Asbury Automotive Group is $297.0, which is the highest 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 bullish end of the spectrum.
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $21.4 billion, earnings will come to $670.3 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 10.2%.
• Given the current share price of $220.27, the bullish analyst price target of $297.0 is 25.8% 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.