Eminence Capital, managed by Ricky Sandler, is coming off excellent returns in 2012. Now the fund has filed with the SEC to report a position of 1.7 million shares in Asbury Automotive Group, Inc. (NYSE:ABG), a $1.2 billion market cap auto dealer. We track quarterly 13F filings from Eminence and other hedge funds as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year), and can see from our records that Sandler and his team did not own any shares of the stock at the beginning of 2013 (find Sandler’s favorite stocks from the 13F).
Asbury Automotive Group, Inc. (NYSE:ABG) has already reported its results for the first quarter of 2013. Revenue growth in both new and used vehicles powered the company to a 15% increase in sales versus a year earlier. Margins were up, and as a result income from continuing operations rose by 39% (Asbury Automotive Group, Inc. (NYSE:ABG) brought in significant earnings from discontinued operations, making the improvement in net income even stronger, but in terms of forecasting future earnings growth we think it’s important to strip that out). The business also generated positive cash flow from operations for the quarter, as opposed to a net usage of cash in operations in Q1 2012. Earnings results for the quarter beat analyst expectations, which had occurred in the previous few quarters as well.
At its current price Asbury Automotive Group, Inc. (NYSE:ABG) is valued at 13 times its trailing earnings. The market may be hesitant when it comes to auto related stocks including auto dealers, but Wall Street analysts are generally optimistic and there’s no exception here: consensus earnings forecasts for the next several years imply a five-year PEG ratio of 0.5. We did see decent numbers on both top and bottom lines last quarter and so Asbury Automotive Group, Inc. (NYSE:ABG) may be well worth further research.
Other publicly traded auto dealers include AutoNation, Inc. (NYSE:AN), Penske Automotive Group, Inc. (NYSE:PAG), Lithia Motors Inc (NYSE:LAD), and Sonic Automotive Inc (NYSE:SAH). Expectations are similar at all five of these firms. AutoNation, Inc. (NYSE:AN), the largest by market cap at $5.5 billion, does feature a small premium to this group with a trailing P/E of 17. It has also reported its numbers for the first quarter of this year; both revenue and net income grew at double-digit rates compared to the first quarter of 2012, joining Asbury Automotive Group, Inc. (NYSE:ABG) in that regard. While the sell-side does not consider it quite as good a value, the PEG ratio is still well below 1.
The other three peers, which are closer to Asbury in terms of their market value, all carry trailing earnings multiples clustered in the 14-15 range. As a result of high expected growth, their forward P/Es also fall a similar level and the highest of these is 12, at Lithia Motors Inc (NYSE:LAD). All three are therefore in value territory in that regard. We would note that the most recent financials for Sonic Automotive Inc (NYSE:SAH) and Penske Automotive Group, Inc. (NYSE:PAG) aren’t as strong as those at the other three companies, as earnings rose by less than 5% in their most recent quarter compared to the same period in the previous year. We wouldn’t rule them out as potential value stocks, but the somewhat weaker performance is notable. Lithia Motors Inc (NYSE:LAD) was in line with Asbury and AutoNation, Inc. (NYSE:AN) in delivering impressive financials. It’s also important to consider that the four small companies (that is, those other than AutoNation) all feature betas of 1.6 or higher demonstrating sensitivity to economic conditions.
The auto dealer industry in general looks somewhat interesting in terms of its value prospects: a number of companies have fairly cheap earnings multiples and have been recording impressive numbers recently. We think that investors could be well served to start by looking more deeply into Asbury Automotive Group, Inc. (NYSE:ABG) and potentially the company’s peers as well.
Disclosure: I own no shares of any stocks mentioned in this article.
