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Asbury Automotive Capitalizes On Subprime Lending To Report Record Earnings

Nov. 10, 2014 9:30 AM ETABG
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Asbury Automotive (NYSE: ABG) in October reported net income for the third quarter of 2014 of $32.5 million. This not only marked a new milestone for the Duluth, Georgia based auto retailer, but was also a remarkable 43 percent improvement when compared with a net income of $22.7 million from the third quarter of 2013.

Asbury Automotives' other major operational highlights during the quarter include an 8 percent increase in total revenue to $1.5 billion. Asbury Automotives' impressive performance during the quarter was attributable to easier access to credit by customers. This helped drive up the sales of new and used vehicles.

Subprime lending continues to feature strongly in the U.S. auto sector. This is because Wall Street has now joined the fray. A report on the New York Times, says that Wall Street is now supplying auto firms with funds to avail money for loans. Moreover, Wall Street is bundling subprime auto loans into complex bonds that are being sold as securities to public pension funds, insurance firms and mutual funds, the report adds. This has created intense demand for subprime auto loans, providing a means for auto firms like Asbury Automotive to tap into a class of customers who would have ordinarily been denied a car loan.

Lower Segment

Asbury Automotive appears it will continue to concentrate its efforts on the lower segments of the market. It is not only loosening credit standards to rope in customers with less than stellar credit, but it is also increasing its exposure in the used car segment. This will allow it to appeal to bargain hunters who don't want to bear the burden of paying off the usurious interest rates of up to 24 percent that typically accompany subprime debt.

In its earnings report, Asbury revealed that as a strategic move, it would open up a third stand-alone used vehicle store branded "Q auto" in Ft. Meyers Florida in the fourth quarter of fiscal 2014. This strongly suggests that the company's two other "Q auto" stores, which it opened in Florida during the third quarter, are doing well. Asbury's decision to open a third used car outfit further highlights the growing demand for used cars in the U.S. In a video report, CNBC's Phil LeBeau argues that used cars have become increasingly profitable for dealers over the past few years.

Going forward, Asbury Automotives' focus on the lower segment of the market will pay off. Moreover, the delicate balance between subprime lending and second hand dealerships allows it to spread its risks while still pursuing the same class of customers. There is still more upside ahead.

Analyst's Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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