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Morgan Stanley is out with a wonderful call on Group 1 Automotive (NYSE:GPI) saying they reiterate their Overweight rating and $50 price target. The company's favorable geographic exposure to Texas / Oklahoma, beneficial brand exposure to Toyota, and solid used trends minimize the chance of a substantial disappointment for the rest of the year despite choppy conditions in the new vehicle market.

If GPI stops missing estimates, investors are likely to start paying attention to the longer-term story and pay a higher multiple of current earnings. Should this happen, they expect the shares to move out of the $40 range.

At a P/E of 10.4x MSCO's 2007e and 9.1x 2008e, the shares trade at a low P/E multiple relative to peers, to the market, and to the company's history. In firm's view, this P/E multiple is implying that GPI cannot grow, improve return on capital, nor generate greater free cash flow. In contrast, they believe GPI can grow earnings, improve return on capital, and generate much greater free cash flow as capital spending slows.

If the company closed half the P/E multiple gap versus AN and PAG (Penske Auto Group), this alone would equate to about $8 of upside in the shares.

Notablecalls: Let's face it - the new vehicle market is a tough market to be in currently. Yet GPI has lots of exposure to the central region that is doing generally better than the rest (units are actually up in TX). Also, having 36% new vehicle exposure to Toyota / Lexus helps.

Results by CarMax (NYSE:KMX) from 3 weeks ago point to a healthier used car market.

Technically, the stock has been bouncing along the $40 level, giving us a nice leash for a swing. I think MSCO's call may attract some nice buy interest today and even over the next week. Also note there's an almost 20% short interest in GPI.

GPI 1-yr chart:

GPI

Source: Expecting Upside in Group 1 Automotive Following Morgan Stanley Note