Morningstar | Group 1 Has Good Quarter Despite WLTP Pressure
Group 1's third quarter gave us no reason to change our fair value estimate. The company did a good job despite a difficult comparable to third-quarter 2017 following a sales spike after Hurricane Harvey in Houston as well as a weak U.K. market in third-quarter 2018. Europe suffered from German brand supply shortages, particularly Audi, unable to fully stock dealerships due to not complying with new emission standards called Worldwide Harmonised Light Vehicle Test Procedure, WLTP. The U.K. made up 20% of third quarter revenue and 16% of gross profit. Management expects its lost U.K. volume to be about 50% recouped in the fourth quarter and is hopeful for another rebound to start 2019, which could happen due to the U.K. plate change in March that often stimulates sales. CEO Earl Hesterberg said some higher end Audi 2019 models are coming into showrooms now, indicating some improvement in WLTP compliance.Adjusted diluted EPS of $2.47 rose 10.8% year over year to easily beat consensus of $2.33 and set a record for any quarter. This earnings growth appears to be almost all from buybacks, however, as declines in new and used vehicle gross profit per unit caused adjusted SG&A as a percentage of gross profit to increase by 80 basis points to 73.6%. We calculate that adjusted operating margin including floorplan interest declined by 30 basis points to 2.7%. We also calculate adjusted EPS of $2.35 using the prior year quarter's share count. This year management has repurchased about 9.5% of its float for $131.4 million. We like the assertiveness but we do wish they had waited a few more weeks for buybacks because the stock recently fell under $60 per share. For example, buybacks conducted in October were at an average price per share of $62.52, a little early in hindsight. With the stock somewhat undervalued in our view, we are glad to see the board authorize an additional $100 million repurchase authorization.
Group 1 Automotive is an operator in the automotive retail industry. Through its dealerships, the company sells new and used cars and light trucks, arranges related vehicle financing, sells service and insurance contracts, provides automotive maintenance and repair services, and sells vehicle parts. The company sells retail used vehicles directly to its customers at its dealerships or via its internet sites and wholesale used vehicles at auctions. The company sells replacement parts and provides both warranty and non-warranty maintenance and repair services, as well as provides collision repair services at the collision centers that the company operates. The company also sells parts to wholesale customers.
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