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ABG - Asbury Automotive


kab60
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This will be a very short writeup. Keith at Bonhoeffer Funds (Packer on here) has some quality comments in some of his quarterly letters.

 

It's a best in class auto dealership (high relative margins) in the US (plus 30 pct. ROE) which trades at 10 times 2020 earnings, earns a very large part of their money on service and maintenance and expect to more than double earnings in five years. I'd say it's a way above average business - low fixed costs, very resilent, high returns in a fragmented industry - trading at something like half the market multiple. Yeah, unsexy, I get that.

 

Yesterday they introduced a new online car buying concept, called Clicklane. In 15 minutes it's possible to buy a new car entirely online and trading in ones current vehicle. They're confident it'll be a gamechanger, and management has historically proven to be conservative.

 

Asbury does 8b of sales today. They expect to hit 20b sales in 2025 with 2b coming from existing stores, 5b coming from m&a and 5b coming from Clicklane. In other words, they expect revenue to grow at a CAGR of more than 20 pct. per year. And they expect EPS to grow faster than revenue, thus getting increased operating leverage from their omnichannel efforts.

 

Bottom line, management expect earnings to more than double in five years (take a look at their track record).

 

If management executes and multiple stays in place, one is looking at a plus 20 pct. IRR. If market assigns a higher multiple, firewords might go off. If Clicklane gains traction, and gets a Carvana-like multiple, it might be a lollapalooza (wouldn't count on it - EV's eating the world and all that).

 

Wanted to keep this brief, as it seems analysts haven't fully modelled the impact of their new 2025-plan just yet, and I suppose it could go higher when analysts have modelled out what just hit them. Or it'll stay in line because it's still unsexy and all that. Appreciate any input.

 

Disclosure: Long

 

 

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Why should I but this and not AN, which has more economies of scale?

 

Aren't auto dealers printing money right now because of temporary vehicle shortages?* Seems like the exact wrong time to buy.

 

 

* Recent analyst report: "This dynamic has been very favorable for dealers’ new and used vehicle margins in recent quarters, but is likely unsustainable long-term as automakers continue to ramp production following shutdowns/stoppages in Mar-May"

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I think AN is a fine business, but I don't like all the management changes and have been a bit annoyed by their capital allocation. I think both the business as well as management is better at Asbury and rotated earlier.

 

Most dealers are printing money this year, but Asbury is estimated to grow EPS DD next year, so it's not like things are expected to come crashing down.

 

There are regional economies of scale in this business, arguably less so nationally. If you look at the numbers, Asbury comes out ahead of AN which I mainly attribute to selling more higher prized vehicles which is also less affected by economic hardship. You see the same thing in the UK with Cambria Automobiles having better margins and ROIC than competitors despite their smaller size. Asbury also has the largest amount of GP % from maintenance and service of all the dealers I've looked at.

 

Perhaps most importantly though, they follow a somewhat different strategy with Asburys digital push.

 

AN is about to invest quiet heavily in building out used dealerships using a CarMax-like strategy. They think the returns will be great, and if they're right, it could be a homerun. Asbury seems to think there'll be less need for physical B&M in the future and obviously have high hopes for Clicklane. Unlike Carvana though, they expect to make money and achieve overall higher margins going forward despite Clicklane at estimated 25 pct. of revenue in 2025.

 

You're possibly right though that the timing is bad. These things seem to get slaughtered in a downturn despite their resilence. Now, perhaps investors are starting to understand how much their models have changed since the GFC (with more emphasis on service/maintenance), and how they're better businesses today), but maybe not.

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Thanks for sharing I hadn’t looked at auto dealers before.

 

I guess the base case is that they continue as is with 30% roe as you say. Looking at existing business lines

1. New car sales at lower PVR shouldn’t be impacted over the longer run as the franchises are monopolies. They are in positive demo / growing states (FL, TX, GA, NC, SC). An EV revolution could disrupt things but assuming you still need to buy new from a dealership these guys have a place.

2. Parts and service should be pretty  consistent and contributes 50% of GP. There is no online replacement for this and competition is fragmented. Long term disruptor would be less cars on road, ev revolution, autonomous vehicles never crashing.

3. F&I is a similar story, simple attachment to new/used volume. Not much variability / disruption.

4. Used car - is where the base business may face threats from online competitors so looking at that a bit more closely.  PVRs seem lower than used retail comps (In the $1500s) -  Carmax ($2.2k), caravans (was in upper $2.5k range and spiked to $4k+ in latest quarter), vroom ($2.1k). Interested to hear more on how the competitive landscape here lines up. Mgmt has 87% ppl still buy with in 60 miles. What is the competitive advantage here, is it all about buying right in order to maximize PVR. How does share shift here and what does that mean for base business

 

Upside levers look to be realistic (click lane at a caravan multiple - why not!, and levered roll ups of smaller players - park place was restructured well) but even without them there’s a bit of heads I do ok, tails I don’t loose, assuming there isn’t an existential threat from online used car side of things.

 

Aside from really major concerns of millennials driving less, car sharing reduces cars on the road, EVs disrupting the world (IMO ppl will keep driving in states like FL, GA, TX, NC, SC for many years to come) what other threats or downsides are there?

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Thanks for sharing I hadn’t looked at auto dealers before.

 

I guess the base case is that they continue as is with 30% roe as you say. Looking at existing business lines

1. New car sales at lower PVR shouldn’t be impacted over the longer run as the franchises are monopolies. They are in positive demo / growing states (FL, TX, GA, NC, SC). An EV revolution could disrupt things but assuming you still need to buy new from a dealership these guys have a place.

2. Parts and service should be pretty  consistent and contributes 50% of GP. There is no online replacement for this and competition is fragmented. Long term disruptor would be less cars on road, ev revolution, autonomous vehicles never crashing.

3. F&I is a similar story, simple attachment to new/used volume. Not much variability / disruption.

4. Used car - is where the base business may face threats from online competitors so looking at that a bit more closely.  PVRs seem lower than used retail comps (In the $1500s) -  Carmax ($2.2k), caravans (was in upper $2.5k range and spiked to $4k+ in latest quarter), vroom ($2.1k). Interested to hear more on how the competitive landscape here lines up. Mgmt has 87% ppl still buy with in 60 miles. What is the competitive advantage here, is it all about buying right in order to maximize PVR. How does share shift here and what does that mean for base business

 

Upside levers look to be realistic (click lane at a caravan multiple - why not!, and levered roll ups of smaller players - park place was restructured well) but even without them there’s a bit of heads I do ok, tails I don’t loose, assuming there isn’t an existential threat from online used car side of things.

 

Aside from really major concerns of millennials driving less, car sharing reduces cars on the road, EVs disrupting the world (IMO ppl will keep driving in states like FL, GA, TX, NC, SC for many years to come) what other threats or downsides are there?

Think most of that is pretty accurate. Only think I'd add is that PVR isn't necessarily the most important variable to look at. Earning a high return is very much a function of buying right (I think this is where dealers might have an advantage with trade-ins) and turning over inventory quickly. Cambria writes about this in their annual reports and follow what they call a velocity trading strategy. It's basically a low margin business (though Cambria and Asbury has higher margins than the industry average due to their focus on higher-end and luxury cars), so inventory needs to be turned quickly to generate an attractive ROE (can perhaps be compared to a grocer).

 

This from the 2016 Cambria report:

 

The adoption of the Velocity trading strategy means that the Group has also concentrated on tight management of its used vehicle inventories, closely monitoring stock turn and used car Return on Investment with an improvement to 147% up from 137% in 2015 and 122% in 2014.Cambria has therefore further distanced itself from the industry average used car Return on investment of 75%.

 

I think there's little fundamental risk at these levels, but these stocks have historically been slaughtered in a downturn despite how resilient they are (Asbury now up 250 pct. since the lows), so perhaps one might try and time their buying. I'm holding since I think it's a secular grower at a reasonable valuation (and I get taxed 42 pct. on gains), but I haven't added since I bought during the spring/summer.

 

And yes, the Park Place deal was beautifully executed. They seem to "get" capital allocation and have a pretty good framework for how they invest.

 

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  • 4 months later...

Results out, looking good. Market has obviously come around to the story (and the sector) since the write-up so it's less of an obvious bargain atm.

 

 

 
ASBURY AUTOMOTIVE GROUP ANNOUNCES
RECORD FIRST QUARTER 2021 FINANCIAL RESULTS
 
First quarter EPS of $4.78 per diluted share,
up 373% over prior year EPS
 
First quarter adjusted EPS of $4.68 per diluted share (a non-GAAP measure),
up 160% over prior year adjusted EPS
 
First quarter revenue increased 36% and
gross profit increased 40% over prior year quarter
 
DULUTH, GA, April 27, 2021 - Asbury Automotive Group, Inc. (NYSE: ABG), one of the largest automotive retail and service companies in the U.S., reported net income for the first quarter 2021 of $92.8 million ($4.78 per diluted share). This compares to net income of $19.5 million ($1.01 per diluted share) in the prior year quarter.
The financial measures discussed below include both GAAP and adjusted (non-GAAP) financial measures. Please see reconciliations for our non-GAAP metrics included in the accompanying financial tables.
“The first quarter of 2021 was very active for us. In addition to posting record performance, we successfully launched our online car buying platform, Clicklane, across our entire store base. Although we are only one quarter into our five-year plan, we feel more confident than ever in our strategic direction and the future growth of Asbury,” said David Hult, Asbury’s President and Chief Executive Officer.
The Company reported adjusted net income (a non-GAAP measure) for the first quarter 2021 of $90.7 million ($4.68 per diluted share) compared to $34.7 million ($1.80 per diluted share) in the prior year quarter.
 
 
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  • 1 month later...

@kab60 any thoughts on the recent selloff. down about 20% in the last month. Nothing appears to have materially changed long term as far as I know. I assume there could be some surprises to the downside on Q2/Q3 unit sales if they have had inventory issues, but wouldn't change the 3-5 year thesis IMO. Have added a little more at these levels.

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No, not really. It has been on a pretty good heater since last summer, so can't say I'm surprised that it is cooling off a bit. I like the story long term, so I'm just holding, but at these levels I prefer Motorpoint PLC in the UK.  Motorpoint actually launched a strategy today with some of the same growth ambitions as ABG although it's a different model (Motorpoint wants to double revenue midterm and increase margins). I bought more Motorpoint today and made it a 10 pct. position, since market seems indifferent to their new strategy despite it's a massive acceleration of growth. And this for a business with prodigious ROIC and cash conversion.

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