Bonhoeffer Capital - Asbury Automotive: 4X Return Today, 8X Return In Five Years

Summary

• Asbury’s growth model is through same-store sales growth (4% per year), internet distribution (10% per year), and synergistic M&A (5% per year).
• ABG has had a per-store growth rate of 67% over the last year.
• Asbury has the highest margins (due to local clustering) and inventory turns when compared to US companies.
• Given a conservative projected EPS growth of 5% per year, Asbury should trade at 19x earnings.

Fahroni

The following segment was excerpted from this fund letter.

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Asbury Automotive (NYSE:ABG): The Distribution Theme

Our holdings in car and branded capital equipment dealerships, convenience stores, building product distributors, automobile transportation logistics, and capital equipment leasing firms all fall into the distribution theme. One of the main KPIs for dealerships and shopping is velocity or inventory turns. We own some of the highest-velocity dealerships in markets around the world. Over the past two years, there have been challenges in some markets hit by COVID, like South Africa and Latin America; but we are seeing recovery now that vaccines have been approved and distributed.

One of our holdings in the distribution theme is Asbury Automotive, an automobile dealership firm. Asbury’s growth model is through same-store sales growth (4% per year), internet distribution (10% per year), and synergistic M&A (5% per year). These are enhanced by opportunistic operational leverage from scale and share repurchases (5% annual growth). Over the past 10 years, Asbury’s net income margins are up 120% with a 5x increase in revenues. These factors should lead to about a 20% EPS growth going forward. Ashtead has had 19% and 31% EPS growth over the past five and 10 years, respectively.

As can be seen below, a large portion of future growth is based upon the growth of internet sales. Both Asbury and Lithia have internet strategies which capture a younger demographic who do not visit dealerships with the same frequency as older folks. Asbury, through its online platform Clicklane, has found internet purchasers have very little overlap with existing customers; 95% are new customers. Asbury’s strategy is to target customers who are within 20 miles of an existing Asbury location vs. online only competitors (like Carvana) and Lithia. Asbury has had a per-store growth rate of 67% over the last year and only sells cars online in about 60% of its current footprint. This growth rate will decline going forward as the markets mature, but it will be bolstered as Clicklane is rolled out to the remaining 40% of Asbury’s footprint.

What complicates the outlook going forward is Asbury’s growth plan and the cyclicality of the auto dealership business. Asbury has the highest margins (due to local clustering) and inventory turns when compared to US companies, leading to high returns on equity of 33% to 41% over the past five years.

Asbury						EPS Growth	26%
		2021	2022	2023	2024	2025	2026	2027	2028	2029		$181.00	2.27	5-yr fwd PE		5% growth PE
												19.9%	5.03	Earnings/FCF Yield		18.5
Revs		$9,837	$15,818	$20,000	$26,000	$33,900	$38,985	$44,833	$49,316	$54,248
			61%	26%	30%	30%	15%	15%	10%	10%			Revenue Drivers
													SSS growth 4%
NI		$549	$796	$738	$988	$1,284	$1,559	$1,793	$1,973	$2,170			Acquisitions - Unit growth 10%
		5.6%	5.0%	3.7%	3.8%	3.8%	4.0%	4.0%	4.0%	4.0%			Internet (10%)
EPS		$24.78	$35.97	$34.38	$47.45	$63.55	$79.59	$94.36	$107.01	$121.35				Market Cap	Target Price	$1,472
			45%	-4%	38%	34%	25%	19%	13%	13%		Shares	22.131	$4,005.71	IRR	52.1%
	Repurchase Rate
Shares		3%	22.131	21.47	20.82	20.20	19.59	19.00	18.43	17.88

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Asbury currently trades for an EPS multiple of about 5.0x and an earnings yield of 20%, with low 20% EPS growth. Asbury’s BBB-rated debt (with an EBITA coverage ratio of 6.7x) is currently yielding 7.3%. Given a conservative projected EPS growth of 5% per year, Asbury should trade at 19x earnings using Graham’s formula of 8.5 + 2 * growth rate. Applying this multiple results in about a 4x return today and an 8x return in five years.

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Disclaimer This letter does not contain all the information that is material to a prospective investor in the Bonhoeffer Fund, LP (the “Fund”). Not an Offer: The information set forth in this letter is being made available to generally describe the philosophies of the Fund. The letter does not constitute an offer, solicitation, or recommendation to sell, or an offer to buy any securities, investment products, or investment advisory services. Such an offer may only be made to accredited investors by means of delivery of a confidential private placement memorandum, or other similar materials that contain a description of material terms relating to such investment. The information published and the opinions expressed herein are provided for informational purposes only. No Advice: Nothing contained herein constitutes financial, legal, tax, or other advice. The Fund makes no representation that the information and opinions expressed herein are accurate, complete, or current. The information contained herein is current as of the date hereof but may become outdated or change. Risks: An investment in the Fund is speculative due to a variety of risks and considerations as detailed in the confidential private placement memorandum of the Fund, and this letter is qualified in its entirety by the more complete information contained therein and in the related subscription materials. No Recommendation: The mention of or reference to specific companies, strategies, or instruments in this letter should not be interpreted as a recommendation or opinion that you should make any purchase or sale or participate in any transaction.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.