Asbury Automotive Group, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Asbury Automotive Group is one of the largest automotive retailers in the United States, operating a network of dealerships offering new and used vehicles, parts, service, and finance and insurance products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Asbury’s core business revolves around franchised car dealerships, providing a variety of services. It operates in a highly competitive industry where brand loyalty, pricing and customer preferences change rapidly, and also where manufacturer agreements put limitations on their moats and profitability.

Business Overview

Asbury Automotive Group, Inc. (ABG) is one of the largest automotive retailers in the United States. The company operates primarily through franchised dealerships, offering a wide range of new and used vehicles, related parts and service, and finance and insurance products. Here’s a deeper dive into its operations:

Revenue Distribution:

  • New Vehicles: The largest contributor to revenue for both 2022 and 2021, with a slight increase as a percentage of total revenue in 2022. As a percentage of gross profit, new vehicles provide 27.5% in 2022 and 25.5% in 2021.

  • Used Vehicles: Also a major component of revenue, used vehicle sales saw a slight decline as a percentage of total revenue in 2022 from 2021. As a percentage of gross profit, used vehicles provide 24.3% in 2022 and 26.2% in 2021.

  • Parts and Service: A significant contributor to the revenue and profit mix, providing a steady revenue stream, and a good profit generator. As a percentage of gross profit, parts and services contributed 36.2% in 2022 and 35.6% in 2021.

  • Finance and Insurance: This segment includes commissions from the sales of vehicle financing and insurance products. As a percentage of gross profit, finance and insurance contributed 11.9% in 2022 and 11.5% in 2021.

Industry Trends

  • Vehicle Inventory: The automotive industry is dealing with a new norm of supply constraints, and higher costs of inventory. In Q3 2022, they had a 27 days’ supply of new vehicles, a decrease from prior quarters. They are working with manufacturers to increase their allocation of inventory.
  • Consumer Behavior: Consumers are increasingly turning to digital platforms for vehicle research and purchases. Also, electric vehicles (EVs) are gaining significant traction.
  • Supply Chain Challenges: Microchip shortages and other disruptions have led to limited new vehicle inventories and increased prices. Also, parts shortages, especially among specific manufacturers, are impacting the repair business.
  • Interest Rates: Rising interest rates have caused concerns about declining affordability and increased financing costs.

Margins

  • New Vehicle Margin: The margin for new vehicles varies between 3-6% of revenues on a per unit basis.
  • Used Vehicle Margin: Used vehicles typically see stronger margins (6-12%).
  • Finance and Insurance: F&I is the most profitable segment (75-85% or more profit margin).
  • Parts & Services: Parts and services gross margin is around 40-50%

Competitive Landscape:

  • High Competition: The automotive retail industry is highly fragmented and intensely competitive, leading to pressure on prices and margins, and limited pricing power. There are numerous competitors at a national, regional, and local level and also the large-auto-manufacturer themselves in form of their own direct-to-consumer approaches.
  • Fragmented Market: The market is not conducive to a winner-take-all scenario with various players of different sizes, including publicly traded players like Carmax, AutoNation, Lithia, Group 1, and Sonic. They also compete with private dealerships and private equity firms. The high level of fragmentation has increased difficulty for individual companies to make more impact.
  • Pricing Pressures: Intense competition in the new car segment leads to a lot of pressure on profitability, and the shift to more direct sales from manufacturers creates uncertainty in the long-term competitive structure.
  • Consumer Expectations: Customers are more informed and often search for the best prices or deals before they make a purchase decision, which drives the importance of cost efficiency and profitability.

What Makes ABG Different?

  • Large Scale: Asbury is one of the largest automotive retailers with a national footprint.
  • Diversified Portfolio: They have a large portfolio of brands across different locations, including luxury, import and domestic vehicles.
  • Proprietary Technologies: They are building an online purchasing platform (Clicklane).
  • Focus on After Sales: They aim to maximize their recurring profits from parts, service, and finance and insurance products.

Financials Analysis

Income Statement

  • Revenues: Asbury has a history of growing revenues steadily over the past few years. The company has had total revenues of 15.01B, 13.52B and 10.6B in 2022, 2021 and 2020 respectively, demonstrating a trend of growing sales.

  • Gross Profit: The company has had a gross profit of $2.95B in 2022, $2.89B in 2021 and $2.33B in 2020 respectively, showing a continued growth of profitability.

  • Net Income: Net income was $620 million in 2022, $517.2 in 2021 and $378.7 in 2020, indicating increased profitability across the company operations.

  • Operating Margins: The company maintains operating margins at a level around 7% indicating a respectable profitability. The operating margins have slightly increased from 7% in 2020 to 7.4% in 2021 and 7.8% in 2022.

  • Earnings per Share (EPS): In 2022, diluted EPS increased to $33.30, compared to $26.65 in 2021, and $18.76 in 2020. This shows great profitability growth in the business.

Balance Sheet

  • Total Assets: As of December 31, 2022, Asbury had total assets of $10.05B compared to $9.307B at the end of December 2021.
  • Total Liabilities: Total liabilities have also gone up to $6.93B at the end of 2022, compared to 6.62B in 2021.
  • Shareholders’ Equity: Shareholder’s equity is $3.11B as of the end of 2022, while it was $2.68B at the end of 2021.
  • Goodwill and Intangible Assets: Goodwill and acquired intangible assets are significant, accounting for 3.4B on the balance sheet in 2022. These assets will need to be tested for impairment each year.

Cash Flow

  • Cash Flow from Operations: Asbury has been able to consistently generate positive cash flows from operations ($680.4 million in 2022, $1177.3 in 2021, and $1172 in 2020) indicating good cash-generating ability from the core operations of the business.
  • Free Cash Flow: However, due to the large amount of required investments in new equipment, facilities and acquisitions, free cash flows are considerably lower and were a negative number of ($86.7 million) in 2022. 2021 and 2020 are better years for FCF which are $722.9M and $670.4M respectively.

Moat Analysis: Rating 2/5

Asbury has some limited structural advantages, but its competitive position is not particularly resilient for long periods due to the nature of the industry.

While Asbury has established a sizeable network of dealerships, and the economies of scale and wide distribution can help, these do not amount to wide-moat characteristics.

  • Brand Loyalty: While the company operates with established automotive brands, the underlying brand strength is owned by manufacturers, and customer relationships can be fleeting based on prices.
  • Switching Costs: Low-to-moderate. Customers can fairly easily switch from one dealership to another without incurring a large amount of time or switching costs.
  • Network Effect: The company does not primarily benefit from the network effect.
  • Cost Advantage: They have not demonstrated a sustainable cost advantage over their peers that cannot be quickly replicated.

Therefore, the company has only a narrow moat.

Risks to the Moat and Business Resilience

  • Economic Downturn: A significant economic downturn will lower demand for vehicles. The automotive industry is cyclical, and during recessions, demand for automobiles often drops off. This will reduce their ability to sell vehicles. As demand is reduced, the financing and aftermarket components will also experience a drop in profitability.
  • Supply Chain Issues: Continued supply chain disruptions, and rising inflation and input costs could severely impact their profitability in the long-term.
  • Increased Competition: Asbury operates in a very competitive market with several other large players who are also trying to gain share. If they lose out to their competitors, market share and profitability may be impacted.
  • Manufacturer influence: Manufacturer’s power of increasing selling channels can hurt the profitability of dealership businesses.
  • Technological Disruption: Online marketplaces and car manufacturers trying to sell directly could also upend the business.
  • Acquisition Integration: A core part of Asbury’s growth strategy has been acquisitions, and it could prove difficult to successfully integrate all operations.

However, there are a few characteristics of the business model that provide a modicum of resilience:

  • Diversified Revenue: A mix of new vehicle sales, used-vehicle sales, finance & insurance, and parts & service allows for more balanced and less cyclical revenues.

  • Parts & Services: These are recurring revenues and are less dependent on short term market conditions.

Understandability: 2 / 5

The car dealership model is relatively easy to understand from the surface, with buying, selling, financing of cars. However, some of the deeper nuances of how these different segments are operated can make a more in-depth analysis complicated.

The business model is quite complex due to the various operating segments (new and used vehicles, parts, service, financing, insurance) with complex accounting rules. The industry dynamics, such as the supply chain and economic factors also make it a complicated area to research. This makes the business difficult to completely understand for someone without previous industry knowledge and business experience.

Balance Sheet Health: Rating 3 / 5

While not weak, Asbury’s balance sheet does not have great amount of strengths either.

The company has a significant amount of debt and lease liabilities on its balance sheet which may put them in financial stress in a downturn.

  • Liabilities: The company has $6.93 Billion in total liabilities which also includes long-term debt of $1.86 Billion and a lease liability of $1.57B.
  • Goodwill and Intangibles: Total goodwill and intangibles are a large number of $3.4 Billion. There is risk of impairments to these assets if future results decline.
  • Liquidity They have a low level of cash and cash equivalents on the balance sheet of only $472.7 Million as of Dec 31, 2022. This could hurt them in case of a sudden market downturn.
  • Debt-to-Equity Ratio: The debt-to-equity ratio of 2.05 indicates that their debt levels are high, and this might impact growth if interest rates keep going up.
  • Credit Rating: As of writing, ABG is rated BB+ by S&P, which is not a great investment-grade rating.

While their financials have a moderate outlook, there are some challenges which might increase the probability of a bad outcome for the company in the long-term.

Management

  • Focus on Shareholder Returns The company has been trying to reward its shareholders through stock buybacks, dividend payments and by acquisitions.
  • Acquisitions and Expansion Management seems keen to grow the company through strategic acquisitions.
  • Investments in Technology They have invested in Clicklane, a technology platform that is expected to help their sales.
  • Management Commentary:
    • In the 2022 Q4 earnings call, they cited improvements in new vehicle sales, and customer pay parts and service while highlighting the success of Clicklane.
  • They have also pointed out that they are working with supply chain providers to improve vehicle inventory levels.
  • In recent earnings calls, there’s talk about their plan to achieve their financial targets while still providing great customer experience.

Other Considerations

  • Acquisition Integration: Successfully integrating the acquired dealerships and companies will also prove vital in generating more value.
  • Regulatory Risks: The regulatory changes that can impact dealerships and related operations will have to be assessed.