To The Moon

$Asbury(ABG)$

ABG is a stock I’ve owned before, and after stepping away for a bit post-earnings, I’ve decided to get back in. The stock price tells the story of its recent volatility: after a strong Q4 report, shares surged up to $300, but they’ve since come down to the ~$220 level. This has created, in my view, a highly attractive entry point for a fundamentally strong, long-term growth story.

The Business: A National Automotive Retail Giant

Asbury Automotive Group is one of the largest automotive retailers in the U.S., operating a broad network of dealerships and service centers. They sell new and used vehicles, offer repair and maintenance services, and provide financing and insurance products. While the headline revenue may be driven by vehicle sales, the real engine of profitability comes from two critical segments: parts & services and finance & insurance (F&I).

Over the past decade, ABG has quietly built an empire in the dealership space. Their strategy has been simple but effective: acquire, optimize, and repeat. While many businesses in the industry have remained relatively local or stagnant, Asbury has been aggressively expanding its national footprint through strategic M&A.

Massive Growth via Strategic Acquisitions

The company has executed a series of transformational acquisitions over the past few years. These aren’t small bolt-ons—we’re talking about multi-billion-dollar deals. Some highlights:

• A $1 billion acquisition here…

• A $4 billion transaction there…

• $1.5 billion elsewhere…

• Most recently, the $1.34 billion acquisition of Herb Chambers, a well-known dealership group primarily based in the Northeast.

These acquisitions have supercharged revenue growth. In fact, if you compare Asbury’s growth to most other auto retailers, it stands out as one of the fastest-growing players in the space.

Yes, they’ve sold off a few non-core or underperforming assets along the way, but on a net basis, they are massive acquirers, constantly increasing the scale and operational leverage of the business.

Share Buybacks: A Quiet but Effective Strategy

Another thing that sets Asbury apart is their consistent and disciplined capital allocation strategy. From 2015 to 2020, the company executed substantial share buybacks, cutting down the share count aggressively. That trend paused slightly during the peak acquisition years, as they had to issue some shares to help fund deals, but recently, buybacks have resumed.

Despite the cyclical nature of the auto industry, they’ve maintained a flexible balance sheet and used excess cash wisely. Over the past few years, the company has averaged about $200 million in share repurchases annually, which may not sound like much—but with a market cap of roughly $4.4 billion, that’s about 5% of the entire company each year. And there’s room to double or triple that number if needed.

The Real Profit Driver: Parts & Services

Let’s talk about where the real value lies.

While ABG earns revenue from multiple streams—new vehicles, used vehicles, parts & services, and F&I—the profit picture tells a different story. The gross margin contribution from parts & services far outweighs that of car sales. In other words, even if unit volumes decline, the company can still post strong earnings if their high-margin services segment continues to grow.

This segment benefits from several durable trends:

• People are keeping their cars longer, especially with high interest rates and vehicle prices.

• Online service bookings are growing quickly, streamlining the customer experience and improving retention.

• EVs will require fewer moving parts, but more software-related and specialized maintenance—an opportunity ABG is already preparing for.

In addition, the F&I segment continues to generate reliable high-margin revenue. Together, these segments act as a cushion against downturns in new vehicle sales.

What About Tariffs?

Now to the elephant in the room: tariffs.

Roughly 51% of ABG’s revenue comes from new car sales, and about 41% of those vehicles are imported. There’s a risk that a portion of these imports could be subject to new or increased tariffs. That could squeeze margins or reduce volume if the costs are passed on to consumers.

However, it's important to note:

• Not all imports will be hit with a blanket 25% tariff.

• Demand will likely shift toward domestic brands if tariffs are enacted, rather than disappearing entirely.

• If fewer consumers can afford new cars, they’ll likely hold onto and maintain their current vehicles longer, which directly benefits ABG’s parts & services segment.

Yes, the car business may slow somewhat, but the overall company is positioned to weather that storm well. ABG is not overly reliant on just new vehicle sales.

Cash Flow & Debt Management: Volatile but Under Control

As expected in this industry, cash flow can be lumpy. Operating cash flow can spike one year and dip the next based on inventory, financing, and macro conditions.

That said, despite the large acquisitions, ABG’s debt load has remained fairly steady over the past year. They’ve even reduced it slightly while also continuing share buybacks, which shows strong operational discipline.

They have several levers they can pull if cash ever becomes tight:

• Pause or reduce buybacks

• Slow down acquisitions

• Sell inventory

• Refinance debt

Moreover, the bond market doesn’t appear too concerned about their financial health. Their 2030 bonds are yielding just 6.27%, and that yield has come down significantly since 2022—a good sign that the market views their risk as manageable.

Valuation: A Compelling Upside Scenario

Let’s dig into the numbers.

Currently, EPS is at $21, but I believe a normalized EPS of $28 is more realistic once recent acquisitions are fully integrated and macro conditions stabilize.

As for growth:

• 4–5% annual share repurchases

• 2–3% organic revenue growth

• Plus additional growth from future acquisitions

All told, I think 8% annualized growth is a very conservative estimate. With a modest P/E multiple of 15, that gets me to an intrinsic value of $470/share, or roughly 88% upside from current levels.

If acquisitions outperform or synergies kick in faster than expected, a higher growth rate (say, 12–15%) could push fair value to $540/share.

On the flip side, even if things go poorly—say acquisitions don’t pan out and all growth comes from buybacks—I still estimate downside around $180/share, which isn’t catastrophic. In that bear case, the company would simply halt acquisitions and ramp up buybacks, which would still create shareholder value over time.

Conclusion: Why I'm Buying ABG Again

To sum it up:

• Conservatively managed business with strong cash flow

• Clear growth via smart M&A and organic expansion

• Underrated profit engine in parts & services

• Buybacks creating long-term shareholder value

• Valuation offers a great risk/reward profile

• Tariff concerns are real, but likely overblown

At the current price around $220, I believe the market is overreacting to macro concerns and underestimating the long-term earnings power of this company.

This is a classic low-risk, high-reward setup in my eyes. While the auto sector is cyclical, ABG has the structure and capital allocation strategy to navigate it well. I’m happy to keep adding here.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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