Asbury Automotive ($ABG)
High-quality Automotive Dealership Roll-up
Company Overview
Asbury Automotive Group is a full-service, integrated retailer of vehicles and related services. They offer new and used vehicles, parts, service and repair facilities, financing, and insurance products. The company owns and operates 152 dealership locations and 37 collision centers within 14 states, working with 31 different car brands. They hold around 1.2% market share in a highly fragmented industry, where the largest company holds just 2.7% share and is aggressively consolidating the market.
Asbury generates revenue in 4 main ways:
New Vehicle Sales (51% of revenue)
Used Vehicle Sales (30% of revenue)
Parts and Service (14% of revenue)
Financing and Insurance (4% of revenue)
However, this picture looks a lot different from a profitability perspective. Around half of their gross profit comes from parts and services alone, a very recession-resistant source of revenue. The parts and service business has strong industry tailwinds from rising vehicle age and complexity. It has grown at 5% on a same-store sales basis for the last 5 years and is projected to keep growing at a similar rate for the next 5 years.
The average car dealership generates 12% of its revenue from parts and services compared to Asbury’s 14%. Scaled dealership groups, like Asbury, have been able to collect a greater portion of customer pay parts and service demand. That is demand from vehicles outside of warranty. This has driven a lot of the growth in parts and services for dealerships over the last decade. Historically, dealerships captured most of their business from vehicles under warranty. The 3-year average warranty mileage for vehicles serviced by Asbury is 46.3k. Whereas, the average mileage across all vehicles Asbury services is 71.6k, up from 68.9k three years ago.
Same Store Parts and Service Revenue Growth Drivers (Q4 24)
(Source: Q4 ‘24 Investor Presentation)
Dealerships exist due to franchise laws, where OEMs are prohibited from selling directly to customers. One of their main purposes is to provide a localized service network for OEMs and carry out warranty repair work. Under franchise agreements with the OEM, dealers are forbidden from establishing new stores of a particular vehicle brand within a specified area that is served by an existing dealership of the same vehicle brand. What this means is each dealership is given a local monopoly for that specific OEM. No dealership of the same OEM can market to customers within this area, so local competition does not exist between dealerships of the same OEM. Competition is between dealerships of competing brands. For example, a local Toyota dealership might compete with the local Ford dealership for sales.
Asbury’s strategy is to create mini-monopolies by consolidating multiple car brands within a specific geographic area. So regardless of which major brand a customer purchases from, the business still flows to Asbury. Based on this strategy, Asbury has a diversified brand mix and is not reliant on any single OEM.
Brand Mix as a % of New Vehicle Revenue
(Source: Q4 ‘24 Investor Presentation)
Another unique piece of the dealer business model is floor plan financing (FPF), where a dealership finances the inventory on its dealership lots instead of paying for it upfront. FPF is done through banks when inventory is held for over 60 days. For inventory held less than 60 days, the manufacturers provide an interest-free stocking period and do not require payment. Although FPF gets recorded as short-term debt on the balance sheet, it’s fundamentally a working capital liability – interest-bearing accounts payable – secured by the vehicles themselves. When adjusting for this, Asbury’s net debt to EBITDA ratio is less than 3x, and the business is more free cash flow generative than it seems on a GAAP basis.
The main driver of future growth will be the roll-up strategy Asbury has been employing. While organic growth will be in the mid-single digits, a combination of accretive M&A or share repurchases can drive EPS into the low double digits. Smaller localized dealerships with limited geographic footprints are more exposed to inventory and cash flow volatility during cyclical drops in new vehicle sales. These players also derive less of their profit from parts and services. In contrast, large dealer groups can leverage their scale, geographic diversification, brand mix, and financial strength to whether tougher operating environments. This disparity drives consolidation, where larger groups can acquire independents at accretive prices across all market conditions, leading to market share gains. Due to higher parts and service revenue per location and better inventory management, independent dealerships tend to become much more free cash flow generative when consolidated.
At just 1.2% U.S. market share, Asbury has a significant whitespace left to capture off their strong base. Unlike typical consolidation plays where acquisition multiples get driven up over time from competition and private equity interest, this sector benefits from inherent barriers to entry. Based on agreements and franchise laws, acquisitions in the dealership industry must be approved or allowed by the OEM. These OEMs are mainly concerned with the buyer’s ability to execute and provide satisfactory service to the customer on their behalf. This has limited private equity influence and is an advantage for established, well-respected operators like Asbury.
Automotive Industry
Replacement demand for light vehicles is estimated to be 17m units annually. SAAR (seasonally adjusted annual rate), which estimates annual vehicle sales has been below replacement demand for the last 4 years and much of recent history. This has driven the steady aging of the vehicle fleet, where the average age is currently 12.5 years, up from 11.5 years in 2015. Vehicles are a necessity in most of the U.S., so if new car sales are below replacement demand, it means either used car sales are higher or parts and service demand is higher. This has been a huge tailwind for auto dealerships, who derive most of their profit from parts and service
Another important trend has been the growing complexity of modern vehicles, characterized by advanced technology, making repairs more difficult. The number of vehicles receiving a comprehensive calibration part of a repair has increased by 9x since 2017. Independent repair shops lack the sophistication or technical expertise to handle these increasingly complex repairs. This has driven a lot of parts and service business to scaled players like Asbury, who is now doing more non-warranty work than ever before.
More complex or possibly electric vehicle repairs support has been a greater mix of service revenue (60-70% gross margin) compared to parts revenue (30-40)%. The 5-year cost of maintenance and ownership for eclectic vehicles has proven to be the same as their ICE counterparts across more models. Electrification and automation only benefit scaled players like Asbury by improving their parts and services businesses.
Public Dealership Peer Group
The dealer industry as a whole performed very well post-WWII, driven by consolidation at the OEM level and greater consumer demand for vehicles. In the late 1990s, large dealership groups began going public. Rush Enterprises was the pioneer of this trend, IPOing in June of 1996, followed by Litha and Penske within 6 months. In the following year, Sonic, Group 1, and Carmax joined them with Autonation in 1992 and Asbury in 2002. Many other dealership groups also went public at this time but were either taken private or bought up by other players. Since their IPOs, these 8 dealership businesses have performed very well as a group, benefiting from similar tailwinds.
The number of car dealerships in the U.S. has been decreasing for almost a century, peaking at 52,125 in 1927 and steadily decreasing over the next decades. By 1960, there were 33,658 dealerships; by 1980, 23,379; and by 2001, just 22,007. In 2023, this figure was just 18,000. Total units sold in the U.S. have increased moderately since the 1980s, but the entire vehicle fleet has been aging, driving greater demand for parts and services.
Essentially, the unit economics of all dealerships have improved substantially, with higher vehicle sales per location and a greater share of revenue coming from parts and services. Since going public, these major dealership groups have taken advantage of these tailwinds to rapidly grow their share of this very fragmented market.
Asbury has been the best-performing company within the entire public dealership peer group, which as a whole has outperformed the S&P500 for over two decades. While multiples for this entire group haven’t expanded or contracted much, Asbury has been able to compound its EPS at 18% for two decades, compared to the peer group average of 13.2%, through its much more aggressive and profitable acquisition strategy. The peer group as a whole has had excellent capital allocation. The companies allocate as much capital as they can to acquisitions and use the rest for buybacks, year after year. Asbury has bought back less stock than the broader peer group. This just means they’ve found more attractive acquisition opportunities relative to their peers, which is reflected in their faster long-term EPS growth rate.
(Source: Q4 ‘24 Investor Presentation)
(Stock performance and EPS are expressed as a 20-year CAGR)
Dealers across both the commercial and automotive space have enjoyed higher gross profits per unit post-COVID. This trend has lasted until the present day, with most citing it as a structural change in the industry. The dealership business model has been very resilient throughout the last 5 decades. All of the major public dealers have been able to adjust, adapt, and overcome the pandemic and the financial crisis, coming out as more profitable entities on the other side.
Asbury, like many of these companies, remained profitable in ‘08 despite many challenges. Floor plan assistance from the OEMs was not high enough to offset higher interest expenses and inventories were taking longer to move. Post ‘08, the OEMs ramped up their floor plan assistance and gave better payment terms to the dealers. In return, dealer orders became more consistent due to better inventory management, reducing cyclicality in OEM sales. Similarly, in 2020 and 2021, with supply-side price shocks, the industry structurally improved. OEMs worked more closely with dealers to reduce inventory levels, boosting free cash flow generation. This brought with it accelerated M&A and share repurchases among the public peer group, driving EPS growth.
Situation Overview
Asbury has traded down 20% in the last month, mainly due to uncertainty surrounding tariffs on automakers. Originally, they were rumored to be exempt, however, the administration has said they will extend the 25% tariff to automakers starting April 2nd. This will impact both the domestic and import categories. Domestic makers like Ford and GM have significant portions of their process outside the United States. Car prices are expected to increase by $4,000 to $12,000 depending on the make and model. While this won’t be accompanied by a margin increase like we saw during COVID-19, it does pose a threat to new car sales. However, based on Asbury’s business model, I don’t see tariffs as a material risk. While the next few years may be a tougher operating environment, I think tariffs may be a net benefit for Asbury over the long term. Given the resiliency of their business model and ability to benefit from near-term volatility, I think there’s an attractive opportunity to take a longer-term time horizon on the business.
One mitigant is that Asbury tries to own each major brand in any given geography they are in. If there is a trade down from import vehicles to domestic vehicles, Asbury will see sales decline in one local dealership, but increase at another local dealership. They have a 30% share of domestic brands compared to 70% of import brands. This is higher than most of their public dealer peer group, leaving them in a better relative position. Another mitigant is that if SAAR remains below replacement, due to higher car prices, it will drive further aging of the vehicle fleet. This will either benefit Asbury’s parts and service business or create demand for used vehicles.
When prices initially increase, as we saw during the pandemic, there will be a near-term free cash flow boost from selling previous units bought at lower prices. In 2021, Asbury generated $1B of free cash flow on a $4B market cap, which they used to accelerate acquisitions. The anti-fragile nature of this business model means that Asbury can benefit from near-term industry weakness. From 2019 to 2024, Asbury was able to take EPS from $9.5 to $21.5 by keeping the share count flat and aggressively pursuing M&A.
The magnitude and direction of the tariff impact remain uncertain. But given these mitigants, I don’t think a 20% selloff is warranted. The stock now trades at 8x NTM earnings and potentially 5x 2027 earnings based on estimates. Near-term consolidation opportunities may improve substantially, given that independent dealers with no OEM diversification will be affected much more. Investors willing to take a longer-term view of the business might find the current opportunity compelling.