Morningstar | Asbury Starts 2019 With Record 1Q Thanks to Service
Auto dealer Asbury Automotive Group reported a good first quarter despite industry sales slowing. Results are not trending far from our model, so we are leaving our fair value estimate in place. Record adjusted first-quarter diluted earnings per share of $2.20 easily beat consensus of $1.92 and grew 14% year over year. Total revenue rose about 4% to slightly beat consensus while same-store revenue rose about 1%. Asbury's new-vehicle sales grew 2%, which is impressive given that the industry retail seasonally adjusted annualized selling rate fell 4% in the quarter. Detroit Three new-vehicle sales were the only major profit headwind as their gross profit fell about 12% despite a 3% volume increase. Management cited less available incentive dollars from these manufacturers than in recent years and also Asbury's own poor performance for an unspecified reason with an unspecified brand. Ford is the company's largest domestic brand at about 9% of new-vehicle revenue. Domestic brands total about 20% of new-vehicle revenue.Parts and service looked to us like the star performer this quarter, with gross profit up 8%. This growth matters because service is the most profitable part of a dealership, contributing 48% of total gross profit for the quarter. The segment has more dollars flow down to the bottom line, which helped the company leverage its selling, general, and administrative expense. SG&A as a percentage of gross profit excluding rent declined 100 basis points to a strong level of 66%. That in turn led to operating margin including floor-plan interest expense by our calculation rising 10 basis points to 4.2%. Management sounded optimistic that this parts growth can continue, and we agree: The company is looking to use technology to reduce staffing, and recent growth in new-vehicle sales means more units in operation to be serviced under warranty.
Asbury continued to return cash to shareholders in the quarter, with $7 million in buybacks, and it has plenty of liquidity for more buybacks and acquisitions with $152 million on its credit line. We expect more deals because management sees its deal pipeline as robust and we expect some dealers may want to sell now since we are late in the auto sales cycle.
Asbury Automotive Group is a holding company. Through its subsidiaries, the company is an automotive retailer. The company's stores provide automotive products and services, including new and used vehicles; parts and service, including vehicle repair and maintenance services, replacement parts and collision repair services; and finance and insurance products, including arranging vehicle financing through third parties and aftermarket products, such as extended service contracts, guaranteed asset protection debt cancellation, prepaid maintenance, and credit life and disability insurance. The company's new vehicle franchise retail network is made up of dealerships operating under locally-branded dealership groups.
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