Unlike automobile manufacturers, which have to keep putting more and more money into R&D and tend to keep too much debt on the books, auto retailers have the luxury (or burden) of being the sales vehicle.
Asbury Automotive Group Inc. (ABG, Financial), headquartered in Duluth, Georgia, is one of the largest automotive retailers in the U.S. It was built through a combination of organic growth and a series of acquisitions and now has 82 retail locations for the sale and servicing of 28 different brands of American, European and Asian automobile makes. From a marketing standpoint, I even love the simplicity of the company’s website.
More importantly, Asbury Automotive is Michael Dell (Trades, Portfolio)’s largest holding in his $400 million MSD Capital at a 26% weighting for 9% of the company. In terms of moving the needle for his $18.7 billion net worth, Dell’s investment company is a minute part of the whole. So, it’s probably easier to take large positions in a handful of companies.
When Warren Buffett (Trades, Portfolio) and Berkshire bought the Van Tuyl Group, it cemented the idea that retailers across the industry could have a durable competitive advantage. It’s fair to say Asbury could be an organization of the same caliber as Van Tuyl, if not better, especially because its stock is available for the public still.
Asbury by the numbers
- Revenue of $6.5 billion.
- Earnings of $160 million.
- Long-term debt of $880 million.
- EPS of $6.50.
- Book of $9.90.
What’s interesting is that since the recession of 2008-09, while Asbury Automotive has almost doubled its total sales, earnings have really accelerated, both in terms of total profit and on a per share basis. These two trends are due to better operating efficiency by expanding margins from 2.8% to 4.5% and through buying back 8 million (25%) of its outstanding shares.
In more recent news, Asbury is experimenting with online used car sales through a subsidiary called Q Auto (qauto.com) with the hopes to hedge how people currently buy cars (in person) with how people may eventually buy cars (all online). Q Auto is a Florida dealer with a focus on providing a great online experience and marketplace for customers.
Asbury's CEO had this to say.
"We don't have a brand. Q Auto is unknown. We have learned to be competitive with very, I think, well-designed, well-thought-out SCM and SEO. We generate tremendous traffic to our stores virtually. So I think that part of the equation, we feel very good about. We've got, essentially, a fixed-price selling model. We sell off an iPad. We've got technologies in the stores that allow the salesperson to manage the transaction from start to finish. We do not transfer the customer to an F&I office. So those technologies and those processes, if you would, I think we feel pretty good with as well."
Going forward
Asbury will be looking for smaller locations that require less capital and promise a quicker capital payback, a strategy that I love. Fears that car sales have hit a peak has hurt the stock in the last year, down about 35% since October 2015. Still, at the current price of $55 per share, the stock has extremely positive upside potential – both from an earnings growth and multiple expansion standpoint.
If net income continues to grow and Asbury keeps retiring outstanding shares, the stock could easily double inside of five years with just a little help from market participants willing to pay 12x or 15x earnings. And, in the case of a bear market (it’s coming), the current price provides a decent margin of safety as to not suffer a fatal blow on the downside.
Disclosure: I do not own Asbury Automotive.
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