The Market is bracing for challenges as we transition to 2019, including lower Auto Production (particularly in China and Europe during 1H19), higher Rates (which raise concerns about Mix, Pricing), the strong U.S. Dollar, Regulatory Content, unpredictable Government Policy/Tariffs, the burden of increased Spending on Technology with uncertain returns, and in some cases discontinued passenger car products.
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Once a quarter, we comb through corporate filings and summarize the most noteworthy datapoints. At a high level, developments during the quarter reinforced our view that investors should be Underweight Autos and Auto Parts, Underweight Dealers, and Overweight a relatively small selection of companies that fall into the Auto 2.0 category. In our view the U.S. Auto Cycle is in its 8th or 9th inning, with looming pressures on vehicle affordability. China is experiencing its first real Auto Industry downturn, and we are not convinced that the Central Government will step in to specifically prop up Autos. Europe also faces a number of challenges: These include potential trade risks (7% of Europe produced vehicles are exported to the U.S.), political risks (Brexit), and regulatory risks (vehicles more expensive to produce, at the same time that pricing has become more challenged).
This morning (10/23/18), ABG reported Q3 2018 results. New and used unit comps were +6% and +8%, respectively. Total revenue growth of 10% beat Cons. +5% and our +8%. New same-store $GP/Unit was down 6% while used was up 2%, and F&I down 1%, leading total front-end yield down 2%. EPS of $2.21 beat consensus of $1.88 and our $2.02. ABG also bought back 2-3% of outstanding shares Q4 to date. Shares were up 11% on the day (vs. a 1% decline for the S&P 500).
We are decreasing estimates and rolling our price target to a year-end 2019 value of $69 (was CY 18 of $76). Our price target uses a 7.5x EV/Adj. EBTITDA, in-line with both peers and where shares currently trade today.
Our analysis of vehicle affordability and price elasticity suggest that the U.S. market could face a 1- million-unit decline, even without a recession. Partly due to changes in China government policy, this market may no longer be as consistent a source of growth and profitability. Europe faces significant regulatory challenges.
This AM (7/24/2018), pre-market, ABG reported Q2 2018 results. New and used unit comps were +1% and +5%, respectively. Total Revenue growth of 6% beat Cons. +2.5% and our +1.7%. Both new and used same-store $GP/Unit were down (4% and 3%, respectively), leading total front end yield down 1%. EPS of $2.08 beat consensus of $1.92 and our $1.90. Shares were up 1% on the day (vs. a flat S&P 500).
Today (07/17/18), after close, Sonic Automotive (SAH, not covered) pre-announced a significant Q2 EPS miss as a result of lower $GP/Unit at BMW and Honda dealerships due to lower OEM incentives on certain models. SAH is now guiding Q2 EPS of $0.32-$0.36 vs. Cons. $0.48 and FY EPS of $1.90-$2.00 vs prior of $2.21-$2.45 and Cons. of $2.26. SAH expects to see margin pressure continue into Q3 at Honda and BMW. Ascribing SAH’s entire miss versus Cons to New $GP/Units would seem to imply a very large decrease (at least DD). ABG is the first to report Q2 results on July 24th.
We undertook the unenviable task of reading the proxy for every company under coverage (and one we don’t cover: TSLA).
Using Return on Invested Capital as a lens, we take a look at which companies and sub-industries capture the highest returns within the automotive value chain. We calculate ROIC across 27 companies within industries including dealers, OEMs, parts suppliers, aftermarket retailers, and service providers.
This morning (04/24/18), ABG reported Q1 2018 results. New and used unit comps were -2% and +1%, respectively. Total Revenue growth of 4% beat consensus/Wolfe estimates of 2%. Both new and used same-store $GP/Unit were down (-4.5% and -6%, respectively), leading total front end yield down 2%. EPS of $1.93 beat consensus of $1.77 and our $1.81. Shares were up +3% on the day (vs. S&P 500 down 1%).
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