On Thursday, Stephens initiated coverage on Asbury (NYSE:ABG) Automotive Group (NYSE:ABG), assigning the stock an Equal Weight rating and setting a price target of $216. The firm based its target on a long-term average enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple of 8.1x, applied to their 2025 EBITDA estimate.
The analyst noted that Asbury's valuation multiples have historically been slightly lower than those of its peers, such as AutoNation (NYSE:AN), Lithia Motors (NYSE:LAD), and Penske Automotive Group (NYSE:PAG). The report does not anticipate a change in the near future due to the uncertainty surrounding the significant revenue acquired by Asbury in the past four years. Over 70% of Asbury's current run-rate revenue comes from these acquisitions.
The acquisitions have notably expanded Asbury’s geographical presence and altered its brand mix. The increased exposure to Stellantis (NYSE:STLA) brands is seen as a temporary challenge. Additionally, the acquisition of Total Care Auto (TCA), a captive finance and insurance (F&I) underwriter, as part of the Miller portfolio, is considered promising but is expected to temporarily lower F&I performance metrics.
Stephens projects year-over-year declines in EBITDA and earnings per share (EPS) for Asbury through 2025, with a forecast for EBITDA to grow by approximately 4% and EPS by around 9% in 2026. This growth is anticipated to be driven by the company's share repurchase program. It was also mentioned that Asbury Automotive does not currently offer a dividend to shareholders.
In terms of share count, the firm models a reduction by 3% in 2024, followed by 2% in both 2025 and 2026. The analyst concluded by expressing a preference for more certainty and a better entry point in the stock in future quarters.
In other recent news, Asbury Automotive has been in the spotlight due to a couple of significant developments. The company reported a record total revenue of $4.2 billion despite facing a CDK outage that temporarily disrupted operations across all its stores, excluding Koons locations. The outage, estimated to impact diluted earnings per share by $0.95 to $1.15 for the quarter, did not prevent the company from achieving record parts and service revenue of $581 million. Adjusted net income for the quarter reached $236 million, with an adjusted earnings per share of $6.40.
On the legal front, the U.S. Federal Trade Commission (FTC) has filed a lawsuit against Asbury Automotive, alleging discriminatory pricing practices at three of its car dealerships in Texas. The FTC claims Black and Latino customers were charged higher prices than other consumers for add-on products and services, often without their consent. The company, which operates over 155 dealerships across more than a dozen states, intends to contest the lawsuit.
InvestingPro Insights
As Asbury Automotive Group (NYSE:ABG) navigates through its recent acquisitions and market conditions, certain financial metrics and analyst insights from InvestingPro may offer additional context for investors. With a market cap of approximately $4.29 billion and a P/E ratio of 10.91, which adjusts to a lower 7.24 based on the last twelve months as of Q2 2024, Asbury appears to be trading at a valuation that could intrigue value-focused investors. The company's revenue growth stands at a solid 6.9% for the same period, indicating a healthy expansion despite concerns over its gross profit margins, which are at 17.75%.
InvestingPro Tips suggest that while Asbury operates with a significant debt burden, analysts predict the company will be profitable this year, having been profitable over the last twelve months. Additionally, Asbury has delivered a strong return over the last five years. However, it's important to note that four analysts have revised their earnings downwards for the upcoming period, and the company does not pay a dividend to shareholders. These factors may influence investor sentiment and strategy.
For those considering Asbury Automotive's stock, it may be beneficial to explore the additional 18 InvestingPro Tips available, which can provide deeper insights into the company's financial health and future prospects. The InvestingPro Fair Value is currently set at $221.99, suggesting a potential undervaluation compared to the analyst target of $265. As the next earnings date approaches on October 22, 2024, monitoring these metrics could be crucial for making informed investment decisions.
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