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Auto Dealerships: 2016 Year End Review

|Includes: Asbury Automotive Group, Inc. (ABG), AN, GPI, KMX, LAD, PAG, SAH

The December 2016 results are now largely in the rear view mirror for the Automotive Dealer segment. Results were mixed. My recap of the group performance follows.

Revenue Growth
YY Growth % ABG AN GPI KMX LAD PAG SAH
Mar-16 0.6 3.5 7.2 5.5 10.8 7.9 0.0
Jun-16 (3.7) 5.7 4.5 2.8 9.2 7.1 (2.9)
Sep-16 (1.9) 4.0 0.8 2.9 8.9 3.9 2.5
Dec-16 1.6 2.6 0.0 4.4 15.0 (0.7) 1.6
Mar-17 est 2.0 3.5 (0.3) 5.8 12.5 2.0 0.2

Note 1-Growth was muted in the group. LAD was the leader by far, due primarily to their acquired dealer revenues. KMX as a used online car reseller has long been viewed favorably as a disrupter. Their growth in Q4 was higher than the rest of the group which relies heavily on new car sales.

Note 2-PAG closed on their acquisition of CarSense in early 2017, which should result in a step up in revenue growth by 1-2pts.

Note 3-LAD acquisitions in C16 will provide favorable comps for 1H 2017.

Acquired growth has been an important theme over the past several years. Run rate revenue growth acquired for last year is as follows:

Rollup Tracking
Acq Rev % ABG AN GPI KMX LAD PAG SAH
2016 revenue --- $450 $415 --- $1,100 $330 ---
% C15 NA 2.2 3.9 NA 14.0 1.7 NA
2017 to date           $340  

Note 1-Revenue acquired % of prior year revenues is a run rate calculation. To see the impact on reported revenue growth the amounts need to be reduced to reflect the date of the transaction.

Note 2-PAG announced their acquisition of CarSense in the UK in late 2016 but the deal didn't close until 2017.

Organic revenue growth and the segment performance can be seen in the following table:

Organic growth % ABG AN GPI KMX LAD PAG SAH
New Vehicles 3.1 (2.4) (3.9)   2.2 (3.3)  
Used Vehicles 6.8 1.5 (0.4) 4.4 7.8 (6.0)  
F&I 8.1 (2.3) 1.9   12.7 (2.8)  
SB&P 7.9 2.1 4.0   6.1 (0.2)  
Total 4.7 (0.9) (1.8)   4.3 (4.4)  

Source: LAD Q4 2016 presentation. Sonic has not yet released results for Q4.

Gross margins are holding up despite new car incentives and discounts by stronger margin contributions from used vehicles, F&I and the service organizations.

Gross Margins
GM % ABG AN GPI KMX LAD PAG SAH
Dec-15 15.9 15.2 14.2 13.1 14.7 14.6 14.7
Mar-16 16.8 16.1 14.9 13.2 15.5 15.0 15.4
Jun-16 16.4 15.3 14.4 13.9 14.8 14.7 14.9
Sep-16 15.8 15.0 14.4 13.6 14.9 14.4 14.0
Dec-16 15.9 14.8 14.6 13.6 14.6 14.9  

All the dealers except AN have been able to keep margins stable through improved used car, service and F&I margins to offset new vehicle margin erosion.

The earnings growth of the group was not consistent across all the dealers. ABG, GPI, KMX and PAG led the pack. KMX is best positioned for C17 if new car purchases slow as expected. The rest of the group will need to find growth through increased focus on used cars, service and acquisitions.

EPS Growth
YY Growth % ABG AN GPI KMX LAD PAG SAH
Mar-16 4.6 (7.2) 8.2 10.4 11.5 5.9 5.4
Jun-16 8.6 8.0 9.1 4.7 5.4 5.7 8.7
Sep-16 6.3 0.0 2.6 7.3 1.5 7.3 (11.3)
Dec-16 19.1 (1.0) 15.2 14.3 6.9 12.3 1.6 est
Mar-17 street 9.6 3.3 7.5 6.8 12.9 7.8 5.1

Note 1-The EPS used for growth calculations is nonGAAP as reported and defined by the companies, and used by their analysts. Sonic results are not yet available.

The recent earnings performance, as compared to consensus expecations, can be seen in the following table. KMX has the strongest recent track record. Both AN and LAD missed expectations for the past two quarters, but both misses were modest and improved for Q4.

Managing Expectations: EPS Surprise Trend
Beat % ABG AN GPI KMX LAD PAG SAH
Dec-15 (3.7) (7.7) (16.1) (7.4) 6.1 --- 5.2
Mar-16 2.3 (3.2) 6.7 4.2 0.6 2.3 ---
Jun-16 --- 2.9 3.3 2.2 1.6 1.8 ---
Sep-16 (5.6) (8.7) (6.7) --- (4.6) 2.0 (13.0)
Dec-16 9.1 (1.0) 4.2 2.9 (0.5) 3.4 TBD

Note 1-The small LAD miss was surprising given they outperformed on revenues. Further analysis is needed to better understand the reason.

Some additional metrics are shown in the following table. AN now has the best debt-to-equity ratio which could presage more acquisition activity in 2017. Valuations are relatively similar aside from KMX, showing minimal valuation impact from projected secular growth rates.

Additional Metrics
Select Metrics ABG AN GPI KMX LAD PAG SAH
Debt/Equity ratio 6.6 1.2 2.9 3.9 2.5 2.9 3.3
NTM PE 10.3 11.6 10.1 20.5 11.9 12.2 10.4
Secular Growth 15.8 10.9 17.4 13.3 25.0 8.2 0.5
EV/TTMSales 0.49 0.34 0.39 1.59 0.55 0.48 0.34
Dividend Yield NA NA 1.2 NA 1.0 2.2 0.9

This group is likely to remain under pressure in 2017. New vehicle demand is expected to be soft which will highlight those dealers who have the ability to mitigate that decline with accretive acquisitions or improvements in used vehicle and service revenue improvements. KMX appears best positioned given their focus on used cars, but the valuation premium relative to the group makes them less attractive. LAD remains my favorite of the group. Their combination of management, operational and financial discipline, leverage and growth are the primary reasons. I do not have a current position in the stock however. They have missed expectations in two consecutive quarters. The lowered guidance for 2017 should reset expectations so they will avoid future misses. The outlook that getting to their goal of $9.00 earnings per share will take 2-6 years shows caution is warranted. The valuation is low enough to justify continued ownership, but their dividend yield at only 1% is not.

Dealer Revenue

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.