Asbury Automotive Earnings: Profit Margins Remain High Despite Falling Earnings
We are not changing our Asbury ABG fair value estimate after the firm reported second-quarter adjusted diluted EPS of $8.95 that beat the $8.24 Refinitiv consensus. Management in April said it will provide an update on its 2025 revenue and EPS targets of $32 billion and at least $55 per share, respectively, at the end of this year. This plan assumed $6.9 billion of acquired revenue for 2023-25, but 2023 has only seen divestitures. CEO David Hult said on the call that they are in aggressive conversations on deals, so something may be looming. If the 2025 targets are reduced, we’d expect share repurchases to accelerate but we may also reduce our fair value estimate in that scenario to reflect 2025 revenue well below the approximately $32 billion we currently model. So far in 2023, Asbury has repurchased $211 million, or 1.1 million shares, and in May the board approved new authorization of $250 million. The balance sheet looks solid to us with adjusted net debt/EBITDA at 1.7 times, which is well below management’s target range of 2.5 to 3.0 times.
Although adjusted overhead costs as a percentage of gross profit increased by 112 basis points, the level is still excellent at only 57.0% which helped enable adjusted operating margin of 7.8%. This margin is still a 70-basis-point decline but also a very high number for a dealer. Cost controls are effective while the company loses some efficiencies this year transitioning recently acquired stores, such as the legacy Larry H. Miller Group locations, over to Asbury’s computer systems. Poor used vehicle affordability did send used unit volume down 21% year over year versus just a 1% new vehicle unit decline. Total gross profit fell 11% as improving inventory drove new vehicle gross profit per unit down 15%, while used affordability for both consumers and Asbury dragged used retail GPU down 18%. These declines are large but not surprising given the industry is coming off record new vehicle profits enabled by the chip shortage.
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