On Thursday, Stephens initiated coverage on Group 1 Automotive Inc . (NYSE: NYSE:GPI) stock with an Equal Weight rating and a price target of $394.00. The firm's assessment is grounded on an 8.0x EV/EBITDA multiple applied to their 2025 EBITDA estimate for the automotive company.
According to Stephens, the long-term average EV/EBITDA multiple for Group 1 Automotive has been 7.7x. However, the firm believes that the historical discount in comparison to its peers, known as the Public 6 companies, was due to Group 1's previous business dealings in Brazil, which the company divested in 2022.
Group 1 Automotive's recent acquisition of the UK-based Inchcape (OTC:INCPY), completed in the third quarter of 2024, is expected to add approximately $2.7 billion in revenue, accounting for about 15% of Group 1's second quarter trailing twelve months (TTM) total.
Stephens suggests that while the Inchcape acquisition has the potential to create significant value, it may also lead to increased selling, general, and administrative (SG&A) expenses in its initial year.
Stephens forecasts that Group 1 Automotive's earnings per share (EPS) will hit $42.03 by 2026, marking a growth of around 7% from their 2025 estimate. The firm notes that Group 1 has repurchased approximately 36% of its outstanding shares since 2019, including 5.5% in the past 12 months. Additionally, the company offers a modest annual dividend, currently yielding less than 1%.
The coverage initiation reflects some caution due to the uncertainties surrounding the Inchcape acquisition, considering its size relative to Group 1 Automotive's total operations.
Stephens estimates a reduction in share count for Group 1 by about 4% in 2024 and roughly 3% in both 2025 and 2026. The firm also anticipates that Group 1 will acquire $400 million in annual revenue in each of the years 2025 and 2026.
In other recent news, Group 1 Automotive continues to demonstrate financial resilience and strategic growth. The company has reported record revenues in new vehicle sales and finance & insurance for the second quarter of 2024, despite a cyberattack on CDK systems that impacted pre-tax income by an estimated $17 million. Group 1 Automotive has also maintained its quarterly dividend at $0.47 per share, demonstrating its commitment to shareholder returns.
Additionally, the company successfully priced a $500 million private placement of senior unsecured notes with a 6.37% interest rate, due in 2030. The proceeds are intended to repay existing borrowings under its revolving credit facility and for general corporate purposes. This move is seen as a strategic decision aimed at strengthening the company's liquidity.
On the expansion front, Group 1 Automotive has acquired four Mercedes-Benz (OTC:MBGAF) dealerships and is expected to finalize the Inchcape acquisition in the next quarter, significantly increasing its UK market presence.
Analysts from the earnings call highlighted the profitability of Toyota (NYSE:TM)'s hybrid vehicles and improvement in EV gross margins, indicating a positive outlook for the company's future. However, the company expects most of the CDK cyberattack impact to be behind them, with no material impact anticipated for the next quarter.
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