About Asbury Automotive Group
It’s just a tough industry to operate in, as the margins tend to be razor thin, even on the good days, and when the economy begins to contract, you can bet your bottom dollar that companies that rely on a strong buyer’s market will have an extraordinarily difficult time weathering the current recession and the deepening thereof.
Headquartered in Duluth, Georgia, Asbury Automotive Group, a well established automotive retailer is essentially one big car dealership enterprise, with around (according to TD Ameritrade’s platform) 186 new vehicle franchises along with 139 dealership locations so it’s plenty safe to say that this is a company that lives and dies on proper inventory management.
Full disclosure, this is one of the primary reasons we’re incredibly uninterested in investing in the automotive sector.
If the market continues to dry up, cars will likely pile up to uncomfortably high levels, inevitably forcing a company such as Asbury to cut into its already depressingly pitiful profit margins just to move metal off of its lots.
That being said, when the economy is humming along and in a more prosperous state, it isn’t a major challenge to sell cars and keep its margins in a comfortable, as elevated as can be state, even if that elevated isn’t all that elevated in the first place.
All things considered, we tip our hats to those who can craft and sustain a national, prominent dealership business, just as Asbury has clearly done.
Who knows, maybe after digging into this company’s financials we will be blown away at the job Asbury’s executives have done and we’ll end up finding a diamond in the automobile rough.
We’ll never know if we never try to find out.
Asbury’s stock financials
With a current market capitalization of $4.31 billion, a share price of $198.61, a price-to-earnings (P/E) ratio of 4.56 and no currently distributed annual dividend, the current valuation (according to the company’s given price-to-earnings ratio) for Asbury is more than favorable, as it is extraordinarily low.
As a sort of reference, it is typically said that a standard P/E, representing that a company’s stock is trading at exactly fair value is 20 whereas anything lower indicates that it is undervalued or trading at a discount.
This being the case, Asbury’s stock (NYSE: ABG) is trading at a tremendously low level, implying that its stock is on some sort of fire sale right now relative to what it is actually worth paying for.
Additionally, we hold no qualms with this company not currently dishing out an annual dividend given all of the moving parts (pun intended, but also referring to the plethora of variable costs in the automotive sector) Asbury has to maintain and manage.
Oddly enough, we’re off to a fairly favorable start with this company.
Diving a bit deeper, according to the company’s balance sheet it has just north of $8 billion in terms of total assets as well as approximately $5.1 billion in terms of total liabilities.
Given the inventory status quo of the automobile (specifically, dealership) space, it doesn’t worry us much at all that this company’s total liabilities are somewhat close to the same level as its total assets. In fact, we might take one step further and say that we think that given all of the supply chain turmoil in recent years and months, this is a stellar balance sheet as Asbury’s executives have proven themselves to be sound financial stewards of the company’s aggregate assets and liabilities.
It would be quite easy to get upside down (more total liabilities than total assets) in this industry.
In terms of the company’s income statement, Asbury’s total annual revenue in recent years has seen some rather impressive growth, especially since 2020.
For instance, the company’s total revenue in 2020 stood at $7.1 billion and jumped the next year to just under $9.9 billion, up to its latest reported figure of a whopping $15.4 billion (2022).
For this sort of a mature automobile dealership company in the crosshairs of the more than unfavorable car market conditions, this is fantastic revenue generation.
We imagine this is a result of the company raising prices across the board, however, perhaps the company is also in the process of growing revenues through expanding its operations in other rural markets around the United States, such as Indiana, as it has also continued its steady growth through strategic acquisitions, such as with prominent regional car dealership Larry H. Miller dealerships for $3.2 billion in recent years.
We’re glad to find that this company is seasoned and established yet has some growth levers to pull.
Onto the company’s cash flow statement, it speaks volumes as to how margin-thin this sector is.
Bearing in mind the rather impressive aforementioned total annual revenue figures, this company’s net income (according to the cash flow statement) has ranged from a low (since 2018) of $168 million (2018) and a high of $997 million (2022) while also clinching positive total cash from operations figures during the same time period.
We don’t feel there is much to take from this other than the previously harped on reality that cars are a market filled with thin margins, in good times and bad.
It’s also a supplemental plus that its net income grew each year (since 2018) even during times of heightened economic distress.
Asbury’s stock fundamentals
Speaking of profit margins, according to TD Ameritrade’s platform, Asbury’s trailing twelve month (TTM) net profit margin is pegged at 6.46% to the industry’s average of 8.21%, which to us, isn’t that material of a difference, although, of course, we’d prefer if Asbury’s TTM net profit margin were equal to or higher than that of the industry’s average.
While it’s somewhat competitive in the sense that it isn’t all that far off from the industry’s average, it isn’t really anything to write home about either.
However, being average and consistent usually never hurt anybody, especially as the state of the economy overall continues to deteriorate.
Moving into the company’s TTM returns on both assets and investment(s), the company’s trail the industry’s averages by notable margins, particularly as it relates to its TTM return on investment, which sits at 14.89% compared to the industry’s average of 25.45%, according to TD Ameritrade’s platform.
No, this isn’t a desired outcome, however, it is a reality that makes sense given Asbury’s recent national growth.
Specifically, with the company continuing to expanding its operating territory across the United States, it makes sense that it will take longer for it to attain a more competitive TTM return on investment, as again, this company has a lot of moving parts and thus it will take more time to achieve returns on the investments on said moving parts.
Reality is reality is reality and we can grapple with this one.
Should you buy Asbury stock?
In more respects than none we are conflicted.
Yes, we have a predisposed disdain for companies operating in the automobile retail sector, however, make no mistake about it, Asbury has some value within.
Not to also mention that its stock (NYSE: ABG) is seemingly severely undervalued relative to its intrinsic value, its moat is sizable, to say the least in the automotive sector, its recent year-over-year (YOY) revenue have been surprisingly resilient, as has the state of its net income during the same timespan.
While we aren’t so hot on the automobile sales scene in the next year or two, to us this is a quality company with a lot of great assets, a swell balance sheet and a proven ability to not only tolerate economic and operational adversity, but to thrive in it.
We give Asbury’s stock a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.