06. Asbury Automotive Group, Inc. (NYSE:ABG)
Price Reaction after the Downgrade: -2.76(-1.18%)
On June 10, JPMorgan delivered a significant adjustment to its assessment of Asbury Automotive Group, Inc. (NYSE:ABG), downgrading the company’s rating from an optimistic “Overweight” to a more neutral “Neutral” rating. This decision comes amid mounting concerns regarding the company’s future performance and prevailing market conditions within the automotive retail sector. Specifically, JPMorgan revised its price target for Asbury Automotive Group, Inc. (NYSE:ABG) from $230 to $228 per share, reflecting a cautious outlook driven by potential headwinds in the automotive retail industry and macroeconomic factors impacting consumer spending on high-value items such as cars.
Asbury Automotive’s stock has exhibited modest performance, hovering around $234.22, marking an approximate 4.1% increase since the commencement of the year. However, the stock encounters mixed sentiment among analysts, with current ratings comprising one buy, one hold, and one sell. The consensus price target for Asbury Automotive Group, Inc. (NYSE:ABG) stands at approximately $231.25, indicating a slight downside potential from its current market price.
The company unveiled its latest quarterly earnings report on April 25, 2024, revealing earnings per share (EPS) of $7.21, which fell short of the consensus estimate of $7.76. Despite this, Asbury Automotive Group, Inc. (NYSE:ABG) revenue for the quarter amounted to $4.20 billion, slightly below the anticipated $4.26 billion, though still reflecting a notable 17.3% year-over-year increase.
Overall, JPMorgan’s downgrade suggests a more cautious stance towards Asbury Automotive Group, Inc. (NYSE:ABG), reflecting both broader industry challenges and specific performance metrics of the company. This adjustment underscores the importance of closely monitoring market dynamics and industry trends in navigating investment decisions within the automotive retail sector.
Bonhoeffer Capital Management stated the following regarding Asbury Automotive Group, Inc. (NYSE:ABG) in its fourth quarter 2023 investor letter:
“Our broadcast TV franchises, leasing, building products distributors and dealerships, plastic packaging, and roll-on roll-off (“RORO”) shipping fall into this category. One trend we find particularly compelling in these firms is growth creation through acquisitions, which provides synergies and operational leverage associated with vertical and horizontal consolidation. The increased cash flow from acquisitions and subsequent synergies are used to repay the debt and repurchase stock; and the process is repeated. This strategy’s effectiveness is dependent upon a spread between borrowing interest rates and the cash returns from the core business and acquisitions. Over the past 12 months, interest rates have been increasing, which has reduced the economics of this strategy; but a large spread still exists if assets can be purchased at the right price. Increasing interest rates have affected the returns on public LBO firms. Some firms have been reducing debt to reduce the impact of higher rates on earnings.
Asbury Automotive Group, Inc. (NYSE:ABG), a US-based automobile dealer group, a portfolio holding, is an example of a private LBO. Given Asbury’s current valuation of an 18% earnings yield and, more importantly, a five-year forward earnings yield of 38%, buybacks are accretive. Management has developed a long-term plan that includes acquisitions and operational leverage from internet sales and pre-paid service plans. The net income annual growth is expected to be 25% over the next two years based upon management’s plan. Holding the current modest 6 times multiple of earnings constant, the rate of earnings growth implies a 25% total return…” (Click here to read the full text)
