Tekion Rollout Will Simplify Guest Experience And Improve Team Efficiency

Key Takeaways

• Strategic shifts focusing on profitability and efficiency could enhance net margins and bolster overall financial performance.
  
• Operational improvements and prioritization in parts, service, and new vehicle markets aim to drive higher-margin revenue growth.
  
• Inventory and execution challenges, along with partner headwinds and deferral impacts, threaten Asbury's revenue, profitability, and efficiency.

Catalysts

Operates as an automotive retailer in the United States.

• The implementation of Tekion in four stores has shown potential to simplify the guest experience, improve team member efficiency, and lower costs per transaction, which could positively impact net margins.
  
• Asbury expects significant operational improvements due to better inventory and model mix for Stellantis, aiming to increase new vehicle gross profit, potentially boosting overall earnings.
  
• As part of its strategic shift, the company is prioritizing profitability over volume in the used vehicle market, leading to improved gross profit per unit and potentially enhancing net margins.
  
• Continued increase in the parts and service business's gross profit, with a focused strategy on customer retention post-warranty and process improvements, may drive higher-margin revenue growth.
  
• Efficient cost management and incremental operational improvements have led to a sequential improvement in SG&A as a percentage of gross profit, which could result in higher net margins in the long term.

Asbury Automotive Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Asbury Automotive Group's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $804.7 million (and earnings per share of $45.37) by about March 2028, up from $430.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 10.6x today. This future PE is lower than the current PE for the US Specialty Retail industry at 13.5x.
• Analysts expect the number of shares outstanding to decline by 2.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.32%, as per the Simply Wall St company report.

Asbury Automotive Group Future Earnings Per Share Growth

Risks

• Asbury Automotive Group anticipates inventory challenges to persist throughout 2025, which could affect their revenue generation capabilities and operational efficiency.
  
• The used vehicle market continues to face supply constraints, prompting the company to prioritize profitability over volume, which may impact revenue growth potential.
  
• There is execution risk in rolling out Tekion, a new platform aimed at reducing costs and improving efficiency, which could disrupt operations or fail to deliver projected SG&A savings if not effectively implemented.
  
• The company is facing headwinds from Stellantis, one of its key partners, in terms of performance and inventory management, which has significantly impacted gross profits and could continue to affect earnings.
  
• Asbury forecasts significant noncash deferral impacts from TCA that might hit earnings severely in 2025, followed by a peak deferral expected in 2026, influencing both short-term and medium-term net margins.

Valuation

• The analysts have a consensus price target of $278.857 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 $300.0, and the most bearish reporting a price target of just $240.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $21.7 billion, earnings will come to $804.7 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 10.3%.
• Given the current share price of $232.51, the analyst price target of $278.86 is 16.6% 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.