The last of the automotive dealers, Lithia Motors, Inc (LAD) weighed in this morning with Q4 2015 earnings that beat consensus by $0.10 per share. This provided a nice follow up to Sonic Automotive (SAH) who reported a Q4 beat yesterday of $0.03 per share. These two dealers were in sharp contrast to large misses from AutoNation (AN), CarMax (KMX), Group 1 Automotive (GPI) and Ashbury Automotive Group (ABG). Penske Automotive Group (PAG) met expectations.
Concerns over discounting and softening sales led to a sector selloff of > 50% but now that the results are in and guidance has been reduced, Sonic and Lithia are seeing a strong bounce consistent with their fundamentals. The following tables show continued strength for the automotive economy, especially in the US.
Revenue Growth
YY Growth % | ABG | AN | GPI | KMX | LAD | PAG | SAH |
Q1-16 est. | 6.4 | 6.8 | 6.5 | 5.3 | 9.5 | 7.8 | 2.4 |
Q4-15 | 9.1 | 5.8 | 5.3 | 4.1 | 11.2 | 12.6 | 5.1 |
Q3-15 | 14.0 | 9.1 | 6.6 | 7.9 | 60.7 | 12.8 | 5.9 |
Q2-15 | 12.4 | 9.1 | 8.6 | 7.1 | 63.4 | 12.2 | 3.0 |
Q1-15 | 13.7 | 13.3 | 7.6 | 14.2 | 66.0 | 11.4 | 4.6 |
Note: The automotive sector is experiencing an accretive consolidation process which inflates all historical growth rates by revenues being acquired.
Gross margins
GM % | ABG | AN | GPI | KMX | LAD | PAG | SAH |
Q4-15 | 15.9 | 15.2 | 14.2 | 13.1 | 14.7 | 14.6 | 14.7 |
Q3-15 | 15.9 | 15.5 | 14.2 | 13.4 | 14.9 | 14.7 | 14.4 |
Q2-15 | 16.1 | 15.7 | 14.4 | 13.5 | 14.9 | 14.9 | 14.7 |
Q1-15 | 16.6 | 16.2 | 15.0 | 13.5 | 15.3 | 15.4 | 15.0 |
Q4-14 | 16.3 | 15.5 | 14.4 | 13.1 | 14.6 | 15.0 | 14.8 |
Note: The margins indicate only minimal discounting and rebates as opposed to commentary by the CEO of AN. Q4 margins actually improved Y/Y at LAD with KMX and SAH showing virtually no change.
EPS Growth
EPS Y/Y % | ABG | AN | GPI | KMX | LAD | PAG | SAH |
Q1-16 est. | 3.8 | -4.1 | 2.7 | 6.0 | 10.8 | 3.5 | 5.4 |
Q4-15 | 22.4 | -5.9 | -9.6 | 5.0 | 22.5 | 2.5 | 1.7 |
Q3-15 | 32.4 | 16.7 | 85.4 | 34.4 | 53.8 | 12.9 | 12.8 |
Q2-15 | 27.7 | 20.5 | 219.4 | 13.2 | 38.8 | 18.0 | 4.5 |
Q1-15 | 26.2 | 22.8 | 23.5 | 26.4 | 35.0 | 14.9 | -2.6 |
Note: All earnings are nonGAAP as reported by companies. Historical numbers are impacted by accretive acquisitions completed. LAD Q1 estimates are slightly above company guidance and are likely to be reduced somewhat over the next couple days. Growth expected to be forecast around 8%.
Managing Expectations: EPS surprise trend
Beat % | ABG | AN | GPI | KMX | LAD | PAG | SAH |
Q4-15 | -3.7 | -7.7 | -16.1 | -7.4 | 6.1 | 0.0 | 5.2 |
Q3-15 | 0.7 | 0.0 | 1.6 | 7.9 | 8.6 | -5.0 | 12.8 |
Q2-15 | 6.3 | -2.0 | 9.4 | 0.0 | 14.1 | 6.1 | -2.1 |
Q1-15 | 10.2 | 9.0 | 5.8 | 11.7 | 12.1 | 3.7 | -2.6 |
Q4-14 | 5.9 | 12.1 | 24.6 | 11.1 | 19.3 | 0.0 | -3.2 |
Note: This table highlights one reason why I believe LAD is the preferred investment in the space. They have a strong trend of managing expectations and then beating them consistently.
Additional Metrics
ABG | AN | GPI | KMX | LAD | PAG | SAH | |
Debt/Equity ratio | 5.09 | 2.59 | 3.02 | 3.64 | 2.37 | 2.54 | 3.05 |
C16 PE multiple | 9.4 | 11.7 | 7.2 | 14.5 | 11.7 | 9.1 | 8.6 |
Secular Growth | 15.1 | 11.5 | 17.4 | 14.8 | 25.0 | 10.3 | 11.0 |
Price/Sales ttm | 0.21 | 0.26 | 0.12 | 0.58 | 0.27 | 0.17 | 0.29 |
Yield | NA | NA | 1.7% | NA | 0.9% | 2.9% | 1.1% |
Note: With all companies pursuing an accretive acquisition strategy the Debt to Equity ratio is magnified. Companies such as ABG with a high debt level will have a harder time securing financing. Debt levels include floor plan short term notes payable.
Summary
This group corrected hard with the rest of the market and was magnified by AN commentary about rebates and discounting. Now that results are known and forward guidance provided, the group is recovering led by SAH and LAD. An interesting comment from the CEO of automotive parts supplier Gentherm (THRM) is worth noting:
"We see the North American market as still being a very, very, strong recovery. I'm not sure if you want to call it a plateau, but we are currently pushing towards 18 million units for the North American marketplace and there are some projects that indicate that it is very possible we'll be getting close to 20 million units.
A big part of that is the hole that the market created for itself in 2008, 2009 and 2010 when the unit volumes shriveled and the age of the fleet in the U.S. went to fairly extraordinary levels. The common age of the U.S. fleet is still an all time record highs. That means that these vehicles are going to need to be replaced over the next three to five years and that shows a good solid steady demand in excess of 17 million and some have said approaching 20 million.
So we're not at all concerned about the North American market having peaked, even if it has reach a plateau, this plateau is going to last for another three or four years."