ABG Stock Study (7-19-23)

Posted by Mark on September 27, 2023 at 06:56 | Last modified: July 21, 2023 09:48

I recently did a stock study on Asbury Automotive Group, Inc. (ABG) with a closing price of $247.42.

CFRA writes:

     > Asbury Automotive Group, Inc., is one of the largest U.S.-based
     > automotive retailers. The company offers a range of automotive
     > products and services, including the sale of new and used
     > vehicles; vehicle maintenance and repair services; replacement
     > parts; vehicle financing; and aftermarket products such as
     > insurance, warranties, and service contracts. As of the end of
     > 2022, the company operated 139 dealerships at 187 franchise
     > locations for the sale and servicing of 31 different brands of
     > both new and used American, European, and Asian automobiles.

Over the past decade, this large-size company has grown sales and earnings at annualized rates of 8.8% and 28.9%, respectively. Lines are narrowing and mostly up despite sales declines in ’16, ’17, and ’20 and an EPS dip in ’17. PTPM is greater than peer and industry averages by trending up from 3.1% in ’13 to 8.5% in ’22 with a last-5-year mean of 5.4%.

Also over the past decade, ROE leads peer and industry averages with a range from 20.3% in ’14 to 61.5% in ’16 and a last-5-year mean of 35.8%. Debt-to-Capital is higher than peer and industry averages by going from 71.3% in ’13 to 86.5% in ’16 then falling to 56.0% in ’22 for a last-5-year mean of 70.3%.

Interest Coverage is 8.9 and Quick Ratio 0.59. M* awards a Standard rating for Capital Allocation, saying “balance sheet… [is] in decent shape both in terms of debt maturity timing… and [a] debt level [perspective].” Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects a 3.9% YOY contraction and 0.3% growth per year for ’23 and ’22-’24 (based on 7 analysts).
• YF projects YOY 3.3% contraction and 4.0% growth for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY 6.0% contraction and 2.7% growth for ’23 and ’24, respectively (4).
• Value Line projects 10.1% annualized growth from ’22-’27.
• CFRA projects 2.5% YOY contraction and 2.2% annualized growth for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 6.5% growth per year.

Given the lower/contracting shorter-term estimates, I am discounting the Value Line projection by 50% to get a conservative forecast of 5.0%.

With regard to EPS growth:

• CNN Business projects a 15.7% YOY contraction and 10.5% contraction per year for ’23 and ’22-’24, respectively (based on 7 analysts), along with 5-year annualized growth of 6.7%.
• MarketWatch projects annualized contraction of 9.8% and 7.9% for ’22-’24 and ’22-’25, respectively (9 analysts).
• Nasdaq.com projects contraction of 5.9% YOY and 4.5%/year for ’24 and ’23-’25 (6 and 2 analysts for ’23/’24 and ’25).
• Seeking Alpha projects 4-year annualized growth of 6.7%.
• YF projects YOY contraction of 15.1% and 5.7% for ’23 and ’24, respectively (7), along with 5-year annualized contraction of 1.4%.
• Zacks projects YOY 15.8% contraction and 5.9% growth for ’23 and ’24, respectively (6), along with 5-year annualized growth of 18.5%.
• Value Line projects annualized growth of 5.8% from ’22-’27.
• CFRA projects contraction of 14.8% YOY and 8.2% per year for ’23 and ’22-’24, respectively.
• M* gives a long-term ACE of 14.2% growth per year.

For my conservative forecast, I am [more than] halving the 6-long-term-estimate mean (8.4%) to get 4.0%. I will use ’23 Q1 EPS of $42.62/share (annualized) as the initial value rather than ’22 EPS of $44.61.

My Forecast High P/E is 6.5. Over the past decade, high P/E has trended down from 17.2 (’13) to 4.6 (’22) with a last-5-year mean of 9.4. The last-5-year-mean average P/E is 7.2. I am forecasting just below the latter (only ’22 is lower).

My Forecast Low P/E is 3.5. Over the past decade, low P/E has trended down from 9.7 (’13) to 3.1 (’22) with a last-5-year mean of 5.0. I am forecasting near the bottom of the range (3.0 in ’20).

My Low Stock Price Forecast (LSPF) of $149.20 is the default based on $42.62/share initial value. This is 39.7% below the previous closing price and 7.4% greater than the 52-week low.

These inputs land ABG in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 6.4%.

PAR (using Forecast Average—not High—P/E) of 0.9% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 21 studies over the past 90 days (my study and 6 other outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 7.0%, 10.7%, 9.4, and 5.5, respectively. I am lower across the board. Value Line projects an average annual P/E of 5.0, which is lower than MS (7.5) and equal to mine.

MS high/low EPS is $68.64/$34.30 vs. my $51.85/$42.62 (per share). I’m not sure where the $34.30 comes from, but my high EPS is lower due to a lower EPS growth rate and my overall EPS range is lower.

MS LSPF of $146.00 implies a Forecast Low P/E of 4.3 vs. the above-stated 5.5. MS LSPF is 22.6% less than the default $34.30/share * 5.5 = $188.65, which results in more conservative zoning. MS LSPF is also 2.1% less than mine.

I think the MS sample size is too small from which to draw valid conclusions.

Regardless, I deem MOS in the current study to be robust. It seems nonexistent based on Value Line’s projected [high] EPS of $50.00/share, but it seems robust based on M* projected EPS of $86.65. My forecast is very conservative (see above).

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are two metrics I now monitor. PEG is 0.42 based on Zacks’ 18.5% long-term EPS growth rate while Relative Value is 0.81 per M*. Both suggest the stock to be undervalued.

Kim Butcher’s “quick & dirty DCF” prices the stock at 3.5 * [$60.00 – ($0.00 + $8.50)] = $180.25 (i.e. overvalued by 37.0%).

I would look to re-evaluate ABG under $196/share.