We recently compiled a list of the 7 Best Auto and Truck Dealership Stocks to Buy. In this article, we are going to take a look at Asbury Automotive Group, Inc. (NYSE:ABG) stands against the other auto and truck dealership stocks.
US Car and Truck Dealership Market
The auto dealership market is one of the key segments of the greater automotive industry. According to a report by Verified Market Research, the auto dealership industry was valued at $257.30 billion in 2023. The market is forecasted to grow at a compound annual growth rate of 4% to reach $338.6 billion by 2030.
The auto dealership market is a consumer-centric industry, which revolves around customer confidence, inflation rates, interest rates, and the overall regulatory environment. According to a press release by Reuters on July 26, the US car market is facing headwinds due to weak prices, high inventories, and difficulties in logging profits.
The slowed market environment has hit shares of major auto manufacturers and car dealerships nationwide. On top of the macro environment challenges, the market was hit by cyber attacks in June 2024. On June 20, CNN reported that the US and Canadian dealership market stood still due to a cyber attack incident at a data provider called CDK Global. CDK Global data is used by more than 15,000 auto dealers across all major countries. While not all auto dealers use CDK to process orders, those that did faced slower sales growth during the quarter.
As per Reuters, the overall new vehicle sales throughout the US in June 2024 stood at 1.32 million units, representing a seasonally adjusted annualized rate of 15.29 million units during the year. Moreover, affordability also remains one of the key concerns for the market, due to which inventories are not expected to advance as strongly as they did over the past 12 months.
Looking ahead, according to the latest Cox Automotive Dealership report on June 10, the Cox Automotive Dealer Sentiment Index (CADSI) remained stable from the first quarter to the second quarter of 2024. The current market index score for Q2 is 42, which suggests that US auto dealers perceive the market to be weak. For context, the score was 45 a year ago and below the threshold of 50. Moreover, the current market expectation shows a decline in market expectations for the next three months, as the market outlook has dropped from a score of 51 in Q1 to 44 in Q2. The downward trend is attributed to the weaker tax refund season and the ongoing political instability due to elections. To read more about the automotive industry you can look at the 7 Best Small Cap Automotive Stocks to Buy.
Our Methodology
To compile our list of the 7 best auto and truck dealership stocks to buy, we used the Finviz stock screener. We selected Auto & Truck Dealership industry to get a consolidated list of stocks. Next, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A customer smiling delightedly after driving away in their new car from the automotive retail shop.
Asbury Automotive Group, Inc. (NYSE:ABG)
Number of Hedge Fund Holders: 31
Asbury Automotive Group, Inc. (NYSE:ABG) is one of the best auto and truck dealership stocks to buy. It was held by 31 hedge funds in Q1 2024, with total stakes worth $1.414 billion. The group operates as one of the largest franchised automotive retailers in the United States and is also a Fortune 500 company. Asbury Automotive Group, Inc. (NYSE:ABG) generates revenue from four business segments namely, New Vehicle Sales, Used Vehicle Sales, Auto Repair and Services, and Finance and Insurance. As per its 2023 annual report, the group owned and operated 208 new vehicle franchises at 158 dealerships across 16 states. The group operates through its omni-channel platform digitally and a diverse physical dealership network. It sells vehicles, parts, and services to individual retailers, other dealers, and vehicle owners.
Asbury Automotive Group, Inc. (NYSE:ABG) delivered a profitable second quarter of 2024 despite the CDK Global outage, which impacted dealerships across the country. CDK Global, which is a major provider of retail software to dealerships in North America suffered a series of cyber attacks in June 2024 forcing them to shut down most of their systems. Asbury Automotive Group, Inc. (NYSE:ABG) was also impacted by the CDK outage and, according to management, the group lost around $0.95 to $1.15 in earnings per share during the quarter. However, despite the outage, the group was able to pull off record total revenue of $4.2 billion and record service revenue of $581 million.
The group was able to increase its total revenue by 13% and gross profits by 2% by effectively utilizing its omni-channel platform, ClickLane, as a transactional software tool. Asbury Automotive Group, Inc. (NYSE:ABG) was able to retail more than 15,200 sales through ClickLane during the quarter, with more than 8,000 transactions in June when CDK was down. Moreover, the company delivered an adjusted EBITDA of $236 million and generated a robust $193 million in adjusted operating cash flow, demonstrating its cash-generating capabilities.
The competitive edge of the group lies in its ability to navigate profitability through tough market conditions by leveraging its resources and brand name. Moreover, the group has also been able to grow its market presence in the country. Since 2019, Asbury Automotive Group, Inc. (NYSE:ABG) has entered at least 5 new markets and deepened its market presence in 3 existing states.
Should you invest in Automotive Group, Inc. (NYSE:ABG)?
The company indeed faced some headwinds from the CDK outage, however, we need to see its history of profitability. The group has been able to grow its top line by 11% and its bottom line by 13% over the last decade. Moreover it also has 52 million in cash and cash equivalents, which offers it some cushion for growth. The stock is currently trading at 9 times its forward earnings, a 44% discount to its sector.
Bonhoeffer Capital Management stated the following regarding Asbury Automotive Group, Inc. (NYSE:ABG) in its fourth quarter 2023 investor letter:
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.
Overall ABG ranks 7th on our list of the best auto and truck dealership stocks to buy. You can visit 7 Best Auto and Truck Dealership Stocks to see the other auto and truck dealership stocks that are on hedge funds’ radar. While we acknowledge the potential of ABG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ABG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
