Company Reports

Group 1 reported a good second quarter despite $22.9 million in pretax income damage from the June 19 CDK dealer management system cyberattack. We are raising our fair value estimate to $312 from $299 on the time value of money and more revenue growth than previously modeled considering how 2024 sales are tracking. CDK restored core services to Group 1 just a week later, and Group 1 mitigated the damage via its consolidated back office and Acceleride digital shopping platform, enabling deals to be structured during that week. The cyberattack on Group 1’s DMS provider in the US caused lost business income of about $17 million ($0.97 EPS) plus a $5.9 million ($0.34 EPS) disaster pay special item charge to compensate salespeople and service technicians for lost business as well as to retain them. We expect most lost vehicle sales volume can be made up in the third quarter, but roughly $25 million of lost service revenue will likely not be made up as those vehicles were likely serviced elsewhere. Adjusted diluted EPS from continuing operations of $9.80 beat the $9.36 LSEG consensus but fell 16.4% year over year as profits continue to come down for dealers after the chip shortage-induced high levels of the past few years.

Group 1's restructurings and investment in technology for used-vehicle procurement have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1's ratio improved to 64.2% including rent expense in 2023 compared with 77.9% in 2007, and management expects it to remain below 70% thanks to permanently reducing nontechnican headcount 11% on a same-store basis versus 2019. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician headcount. Val-U-Line comes from wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. The AcceleRide omnichannel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. We think digital will enable much better SG&A leverage than the company has had in the past and increase used-vehicle sales over time.

We are not changing our Group 1 fair value estimate after the firm reported a good quarter to start 2024. Adjusted diluted EPS from continuing operations of $9.49 fell 13.2% year-over-year but beat the LSEG consensus of $9.38. Total revenue rose 8.2% to a first-quarter record of $4.5 billion while same-store revenue rose 4.6%, with all segments up except for used wholesale. New-vehicle profitability continues to come down for the dealer sector after artificially high levels induced by the chip shortage. Same store new vehicle units grew 6.4% but new vehicle gross margin contracted by 230 basis points to 7.3% on a 24.2% decline in new-vehicle gross profit per unit. We expect this trend to last all year for the dealers. We continue to be impressed with management's technology change in used vehicles and better inventory location management generating 6.9% used unit growth, but also 3.9% growth in aggregate used gross profit despite a 2.9% fall in used-vehicle GPU to $1,657.

Group 1's restructurings and investment in technology for used-vehicle procurement have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1's ratio improved to 64.2% including rent expense in 2023 compared with 77.9% in 2007, and management expects it to remain below 70% thanks to permanently reducing headcount by 7% during the pandemic. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician headcount. Val-U-Line comes from Group 1 wisely, in our opinion, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. The AcceleRide omnichannel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. We think digital will enable much better SG&A leverage than the company has had in the past and increase used-vehicle sales over time.

Group 1's restructurings and investment in technology for used-vehicle procurement have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1's ratio improved to 64.2% including rent expense in 2023 compared with 77.9% in 2007, and management expects it to remain below 70% thanks to permanently reducing headcount by 7% during the pandemic. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician headcount. Val-U-Line comes from Group 1 wisely, in our opinion, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. Val-U-Line only sells high-mileage used vehicles. The AcceleRide omnichannel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. We think digital will enable much better SG&A leverage than the company has had in the past and increase used-vehicle sales over time.

Group 1’s stock fell more than 6% during Jan. 31 trading after the company reported fourth-quarter adjusted diluted earnings per share that missed the LSEG consensus. We are not changing our fair value estimate but will reassess all modeling inputs when we roll our model forward for the 10-K filing. Adjusted EPS fell 12.6% year over year to $9.50, well below the $10.44 consensus. Revenue was not a problem, other than falling used-vehicle sales in the U.S.; total same-store sales grew 5.2% excluding foreign currency impact. However, the U.K. segment suffered problems in the quarter, with gross profit falling 3.4% and adjusted overhead costs as a percentage of gross profit increasing by 10.4 percentage points to 85.1%, versus the overall company figure of 66.5%.

Most automakers reported final sales numbers for 2023 on Jan. 3. Adjusting for one selling day fewer, Wards put the year-over-year December sales increase at 17.3% and the seasonally adjusted annualized selling rate at 15.83 million, up from 13.55 million in December 2022. Full-year sales increased 12.4% to 15.46 million. We think the worst of the chip shortage is finally behind the industry, but we expect some supply shortages in 2024. As inventory continues to recover, we expect incentives as a percentage of average transaction price to keep rising from artificially low levels of barely above 2% in late 2022 (currently just over 5%), which will pressure automaker and dealer margins in 2024 relative to the past two years. Better inventory and U.S. interest rates likely done rising should bring some consumers back to the showroom. Affordability remains a challenge though, so we expect only a small increase in 2024 light-vehicle sales to the high 15 million range.

At the Los Angeles auto show on Nov. 16, Hyundai announced a partnership with Amazon in which, starting next year, some of its dealers will sell new vehicles on Amazon.com. The news sent each of the six franchise dealers and CarMax down about 5%-8%, which we think is a large overreaction predicated on fears of Amazon taking share away from dealers. Such a risk is not even possible on new vehicle sales due to state franchise laws, nor do we think it is likely that Amazon wants to do all aspects of auto retailing such as handling and disposing of trade-ins, service, and finance and insurance offerings. Service is a very underappreciated benefit that dealers provide customers when comparing the traditional auto industry to digital retailing and electric vehicle startups' direct sales formats. Should Amazon directly sell used vehicles someday, CarMax would have more competition, but it also has the ability to sell via brick-and-mortar, digital-only, or any combination of both depending on what the customer wants, something a digital-only retailer cannot offer. Our auto coverage has been implementing omnichannel tools for years and we doubt that any of their management teams are surprised by the Amazon news.

Narrow-moat Group 1’s third-quarter results bucked the trend this year of unaffordable used vehicles hurting used-vehicle segment profitability. Adjusted diluted EPS of $12.07 was an all-time record and beat the Refinitiv consensus of $11.48, sending the stock up 3% on Oct. 25 while the other five public dealers fell. We've raised our fair value estimate to $275 from $260 on the time value of money and about 4% higher revenue modeled over our five-year explicit forecast period to reflect 2023 results so far. Detroit Three brands make up about 21% of new-vehicle unit volume this year, and the United Auto Workers strike has also shut down GM's and Stellantis’ parts distribution centers that supply dealers' lucrative service operations. However, Group 1 stocked up on parts in anticipation of the strike and is moving them around stores as needed. Those two automakers have been using salaried workers to ship some parts to dealers, but CEO Daryl Kenningham said parts shortages are coming soon without a strike resolution, though the impact may not be severe. With total liquidity of over $700 million plus no major debt maturities until 2027, Group 1’s balance sheet is in good enough shape to handle more turbulence, in our view.

Group 1's restructurings and investment in technology for used-vehicle procurement have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1's ratio improved to 61.4% including rent expense in 2022 compared with 77.9% in 2007, and management expects it to remain below 70% thanks to permanently reducing headcount by 7% during the pandemic. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician headcount. Val-U-Line comes from Group 1 wisely, in our opinion, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. Val-U-Line only sells high-mileage used vehicles. The AcceleRide omnichannel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. We think digital will enable much better SG&A leverage than the company has had in the past and eventually increase used-vehicle sales.

Group 1’s second quarter saw adjusted diluted EPS from continuing operations fall from the prior year’s record $12 figure, but the decline was only 2.3% to $11.73, which beat the $11.08 Refinitiv consensus. Same-store revenue grew 5.9%, with only finance and used vehicles not growing, a pattern across our auto dealer coverage this earnings season. Used vehicles are suffering from low late model availability and high prices induced by the chip shortage and pandemic. We raise our fair value estimate to $260 per share from $246 on: 1) the time value of money; and 2) slightly higher revenue growth over our five-year explicit forecast period than our prior assumption—due to 2023 U.S. new light vehicle sales trending higher than our prediction of as high as 14.7 million.

Group 1's restructurings during the financial crisis, such as new dealer and customer systems, have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1's ratio improved to 61.4% including rent expense in 2022 compared with 77.9% in 2007, and management expects it to remain below 70%. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician headcount. Val-U-Line comes from Group 1 wisely, in our opinion, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. Val-U-Line only sells high-mileage used vehicles, and the brand is not a stand-alone used-vehicle store like three other public dealers are doing. The AcceleRide omnichannel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. We think digital will enable much better SG&A leverage than the company has had in the past and eventually increase used-vehicle sales.

We see nothing in Group 1’s first-quarter results to merit changing our fair value estimate. Adjusted diluted EPS from continuing operations grew 1.1% year over year to $10.93, which beat the Refinitiv consensus of $9.87. We calculate EPS would have fallen 15.5% excluding share repurchases done since the prior year’s quarter. For the 18 months ended March 31, management has reduced the number of outstanding shares by 23.1% at an average price of $178.91 per share, which we like as it is below our fair value estimate and below where the stock trades on April 26. The first quarter saw 1.3% of the beginning 2023 share count repurchased for $34.7 million and remaining authorization is $128.5 million. The board also increased the annualized dividend rate by 20% in February to $1.80 per share. With $672 million in liquidity we see the company well set up to grow via acquisitions while also continuing to return cash to shareholders. The company said some sellers of potential acquisition targets are having unrealistic expectations, so aggressive repurchases are, in our view, likely to remain a key part of capital allocation this year. In March, however, Group 1 acquired the fifth-largest Chevrolet store in Florida, which is expected to add $150 million in annual revenue.

Group 1's restructurings during the financial crisis, such as new dealer and customer systems, have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1's ratio improved to 61.4% including rent expense in 2022 compared with 77.9% in 2007, and management expects it to remain below 70%. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician head count. Val-U-Line comes from Group 1 wisely, in our opinion, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. Val-U-Line only sells high-mileage used vehicles, and the brand is not a stand-alone used-vehicle store like three other public dealers are doing. The AcceleRide omnichannel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. We think digital will enable much better SG&A leverage than the company has had in the past and increase used-vehicle sales.

Group 1 closed 2022 with another strong quarter and we're glad to see the firm continuing to repurchase plenty of what we see as an undervalued stock. Adjusted diluted EPS of $10.86 rose by 15.2% year over year and beat the $10.66 Refinitiv consensus. Same-store revenue growth of 5.9% (up 8.7% excluding foreign exchange) had growth in all consumer-facing segments and total revenue increased by 16.6% to also beat consensus. We are not changing our fair value estimate but will revisit all modeling assumptions after the 10-K is filed.

2022 U.S. light vehicle sales per Wards were 13.7 million, an 8.1% decline from 2021 and their worst year since 2011’s 12.8 million. December sales, however, grew 4.9% year over year with the seasonally adjusted annualized selling rate at 13.31 million, up from December 2021’s 12.72 million. The chip shortage rather than poor demand is to blame and we expect one more year of constrained production for the industry. Regardless of high interest rates and average transaction prices over $45,000, we feel U.S. autos have been at recessionary levels for a lot of the time since spring 2020, so we expect 2023 sales to rise by midsingle digits. Gradual improvement in new vehicle inventory should help used vehicle pricing eventually be more affordable for consumers, which is also good for dealers’ used vehicle margins that are currently squeezed by high procurement costs.

Group 1 reported a robust third quarter despite the strong dollar against the pound creating translation headwinds for the U.K. business. Adjusted diluted EPS of $12.00 rose 27.1% year over year and beat the Refinitiv consensus of $11.30. We are raising our fair value estimate to $230 per share from $221 to reflect the time value of money and a lower share count. We like that management is repurchasing stock below our fair value estimate. Group 1 has bought back $459.6 million of shares this year through Oct. 25 and repurchased over 20% of its stock in the past 12 months. The authorization has $64.1 million remaining, but we would not be surprised to see a new authorization announced in the fourth quarter as retiring CEO Earl Hesterberg said on the call that more buybacks are likely.

Group 1's restructurings during the financial crisis, such as new dealer and customer systems, have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1's ratio improved to 60.3% including rent expense in 2021 compared with 77.9% in 2007, and management expects it to remain below 70%. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician head count. Val-U-Line comes from Group 1 wisely, in our opinion, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. Val-U-Line only sells high-mileage used vehicles, and the brand is not a stand-alone used-vehicle store like three other public dealers are doing. The AcceleRide omnichannel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. We think digital will enable much better SG&A leverage than the company has had in the past and increase used-vehicle sales.

Group 1 announced on Aug. 24 that president and CEO Earl Hesterberg, 69, will retire at the end of the year and leave the board at that time. Hesterberg has been CEO since joining Group 1 in April 2005. Daryl Kenningham, 58, president of the U.S. business and an 11-year veteran of the firm, will succeed Hesterberg. Kenningham is also now promoted to president and COO. Kenningham has about 35 years of automotive experience including time with Nissan in the U.S. and Japan and about 13 years with distributor Gulf States Toyota holding various senior roles in finance, marketing, and logistics. Kenningham was also president of Group 1’s now sold Brazil segment, so we think he has plenty of international experience to handle Group 1’s U.K. operations. We are not changing our fair value estimate, and we expect Kenningham to continue on the same path Hesterberg led, which is one focused on continued acquisition growth in the U.S. and U.K. while also continuing the omnichannel initiatives via Group 1’s Acceleride tool.

Group 1 reported a record quarter, with second-quarter adjusted diluted earnings per share from continuing operations of $12.00 beating Refinitiv consensus of $10.83. The Brazil segment, which was sold July 1, added another $0.10. Same-store revenue fell 4.3% year over year (down 2.3% excluding foreign exchange), but total revenue rose 14.3% as the integration of the Prime acquisition and other 2021 deals is going faster than expected. We see Group 1’s stock as undervalued and think the company is very well set up to keep delivering strong results while also deploying cash for buybacks and acquisitions to keep growing; thus, we are not changing our fair value estimate. Group 1 has acquired net annual revenue of about $585 million in 2022, and we expect more deals this year.