Group 1 Automotive Inc.
/ (GPI-NYSE)/ Equity Research / GPI | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 07/24/2014
Current Price (01/21/15) / $77.68
Target Price / $82.00
SUMMARY
We are initiating coverage on Group 1 Automotive with a Neutral recommendation. The companyposted a 30.8% year-over-year increase in adjusted earnings per share to $1.57 in the third quarter of 2014, surpassing the Zacks Consensus Estimate by $0.13. Revenues increased 12.2% year over year to $2.63 billion, beating the Zacks Consensus Estimate of $2.58 billion. The increase was driven by strong performances across all its businesses. The company benefited from numerous acquisitions and the rising sales of new vehicles. It focuses on returning value to shareholders through share repurchases and dividend payments. However, we are concerned about higher dependence on some auto manufacturers and rising competition in the automotive market./ Equity Research / GPI | Page 1
SUMMARY DATA
52-Week High / $92.9452-Week Low / $60.32
One-Year Return (%) / 22.71
Beta / 1.62
Average Daily Volume (sh) / 187,502
Shares Outstanding (mil) / 24
Market Capitalization ($mil) / $1,864
Short Interest Ratio (days) / 10.61
Institutional Ownership (%) / N/A
Insider Ownership (%) / N/A
Annual Cash Dividend / $0.76
Dividend Yield (%) / 0.98
5-Yr. Historical Growth Rates
Sales (%) / 17.7
Earnings Per Share (%) / 24.3
Dividend (%) / 14.6
P/E using TTM EPS / 14.6
P/E using 2014 Estimate / 14.0
P/E using 2015 Estimate / 12.0
Zacks Rank*: Short Term
1–3 months outlook / 2 - Buy
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Mid-Blend
Industry / Ret/Whl-Auto&Tr
Zacks Industry Rank * / 18 out of 267
OVERVIEW
Group 1 Automotive, Inc. (GPI) is one of the leading automotive retailers in the U.S.It has operations in 14 states in the U.S, 13 states in the U.K and 3 states in Brazil.
Group 1 Automotive has 153 automotive dealerships, 198 franchises and 38 collision centers in the U.S., U.K and Brazil. The company offers 33 different brands of vehicles, the core ones being Toyota, BMW, Honda, Ford, Nissan, General Motors, Chrysler, Volkswagen, Mercedes-Benz and Hyundai. These brands represented 96.4% of the new vehicle sales in the first nine months of 2014.
Apart from selling new and used vehicles, Group 1 Automotive also offers vehicle financing and insurance and service contracts. Further, it provides maintenance and repair services, and sells replacement parts and aftermarket automotive products. In the first nine months of 2014, New Vehicle represented 57.5% of the total revenue, Used Vehicle retail represented 23.6%, Wholesales represented 3.8%, Service and Parts represented 11.4% and Finance & Insurance represented 3.7%.
The company operates through three reportable segments: the U.S., the U.K. and Brazil. The segments cover retail automotive franchises, which sell new vehicles, used vehicles, parts and automotive services, finance and insurance products, and collision centers. The U.S. retail network consists of two regions: the East with dealerships in Alabama, Florida, Georgia, Louisiana, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, and South Carolina; and the West with dealerships in California, Kansas, Louisiana, Oklahoma, and Texas.
REASONS TO BUY
Group 1 Automotive regularly acquires dealerships and franchises to expand its business. In Dec 2014, it acquired three BMW/MINI dealerships in the U.K., which are expected to boost annual revenues by $225 million. The company now has 17 dealerships in the U.K., which should help generate annual revenues of $1.3 billion. In Sep 2014, Group 1 Automotive acquired a Mercedes-Benz dealership in Campo Grande, Brazil. In Aug 2014, Group 1 Automotive acquired a Mercedes-Benz dealership in Boerne, TX, which will generate annual revenues of approximately $135 million. In Jul 2014, the company acquired two dealerships, namely Munday Chevrolet and Munday Mazda in Houston, TX, which are expected to boost revenues by $225 million per annum. In May 2014, Group 1 Automotive acquired the South Point Kia dealership in Austin, TX, which is expected to boost its revenues by about $55 million annually. In Apr 2014, Group 1 acquired the Alex Rodriguez Mercedes-Benz dealership in League City, TX, which is expected to generate annual revenues of $85 million. Concurrently, the company opened a new South Loop Hyundai dealership facility in Houston. In Jan 2014, Group 1 Automotive acquired two dealerships, namely Heller Ford and Heller Hyundai in Southern California. The acquisitions are expected to boost annual revenues by $135 million.
Group 1 Automotive has a strong balance sheet. This allows the company to actively pursue capital deployment strategies to boost shareholder value. As a result, in Nov 2014, the automotive retailer announced an 11.8% increase in dividend to $0.19 per share. In addition, the company increased the share repurchase authorization to $100 million. In aggregate, Group 1 Automotive had repurchased 555,909 shares at an average price of $67.12 for a total of $37.3 million under the previous repurchase authorization. As of Sep 30, 2014, it had around $37.7 million remaining under the prior share repurchase authorization.
Group 1 Automotive has been benefiting from increasing new vehicle sales over the past few years. In 2013, unit sales rose 21.2% to 155,866 vehicles. New vehicle unit sales escalated 6.6% to 124,699 units in the first nine months of 2014. The company expects the U.S. automotive markets to perform well in the future due to the improving U.S. sales environment. This should have a positive impact in Group 1 Automotive’s sales. Additionally, regular acquisitions will boost the sales of the company.
In Sep 2014, Group 1 Automotive redeemed all of its 2.25% Convertible Senior Notes due in 2036. The company also purchased the remaining $22.55 million of its outstanding 3.00% Convertible Senior Notes due in 2020. The company financed these purchases by using the proceeds from the issue of $200 million 5.00% Senior Notes due in 2022 and extra funds from a $350 million issuance in the second quarter. All these factors along with the previously reported redemption of 80% of its 3% notes in the second quarter has reduced the share count by around 2.7 million shares and will improve the earnings of the company by $0.12 in each quarter.
REASONS TO SELL
Group 1 Automotive competes with other franchised automotive dealerships, private market buyers and sellers of used vehicles, Internet-based vehicle brokers, service centers, repair shops and parts retailers. Rising competition and increasing price transparency can lead to lower selling prices, thus affecting the profits of the company.
Group 1 Automotive’s new vehicle sales are dependant on certain major automakers including Toyota, Nissan, Honda, Ford, BMW, Volkswagen, Hyundai, Daimler, Chrysler and General Motors dealerships. Sales of Toyota/Scion/Lexus new vehicles represented 26.6% of the new vehicle unit sales in 2013 and 27.2% in the first nine months of 2014. These automakers may be adversely affected by economic downturns or other events, which will affect the manufacturer’s ability to profitably design, sell, produce or distribute new vehicles. This will have unfavorable impact on Group 1 Automotive’s business, results of operations and financial condition as it is directly dependant on these manufacturers for its vehicle inventory.
Group 1 Automotive has an extensive merchandise inventory. As of Sep 30, 2014, the company’s inventory comprised 77.3% of the current assets. The high proportion of inventory in the current assets can affect the short-term liquidity of the company in periods of low sales.
RECENT NEWS
Group 1 Automotive Earnings Beat Estimates, Rise Y/Y– Oct 23, 2014
Group 1 Automotive posted a 30.8% year-on-year increase in adjusted earnings per share to $1.57 in the third quarter of 2014. Adjusted earnings surpassed the Zacks Consensus Estimate by $0.13. Net income grew 21% to $39.8 million from $32.9 million in the year-ago quarter.
Revenues increased 12.2% year over year to $2.63 billion, beating the Zacks Consensus Estimate of $2.58 billion. The year-over-year improvement was driven by strong performances across all its businesses.
Revenues from new vehicle sales escalated 9.7% to $1.5 billion on a 5.2% increase in unit sales to 44,494 vehicles. Revenues from retailed used vehicles improved 16.2% to $615.9 million on a 10.4% increase in unit sales to 28,776 vehicles. Revenues from wholesale used vehicles went up 17% to $100.3 million. Used vehicles wholesale volume increased 9.7% to 14,750 units.
Revenues from the Parts and Service business increased 14.3% to $291.8 million. The company’s Finance and Insurance business witnessed a 17.7% rise in revenues to $97.1 million.
Gross profit increased 13.7% to $374.7 million from $329.5 million in the year-ago quarter. Operating income improved 23.9% to $90.4 million from $72.9 million in the third quarter of 2013.
Segment Details
Revenues in the U.S. business increased 15.1% to $2.2 billion due to better performance in all operations, the improving U.S. sales environment and benefits from recent acquisitions.
Revenues in the U.K. augmented 7.4% to $252.2 million from $234.9 million in the year-ago quarter due to significant growth across the used vehicle, parts and service, and finance and insurance businesses, partially offset by softer sales in the new vehicle retail business.
Revenues from the Brazil business decreased 8% to $198.6 million in the quarter. New vehicle retail sales were 4,072 units, while total used vehicle sales were 1,793 units.
Financial Details
Group 1 Automotive’s cash and cash equivalents surged to $50.7 million as of Sep 30, 2014, from $20.2 million as of Dec 31, 2013. Total debt amounted to $330.7 million as of Sep 30, 2014, compared with $287.2 million as of Dec 31, 2013.
The company had an operating cash flow of $271.8 million in the first nine months of 2014 compared to a cash flow of $129 million in the corresponding period of 2013.
Capital Restructuring
In Sep 2014, Group 1 Automotive redeemed all of its 2.25% Convertible Senior Notes due in 2036. The company also issued $200 million 5.00% Senior Notes due in 2022 to fund the redemption. Further, the company purchased the remaining $22.55 million of its outstanding 3.00% Convertible Senior Notes due in 2020. This will reduce the share count by around 2.7 million shares and will also remove significantly the variability from the quarterly results.
Dividend & Share Repurchase
In Nov 2014, Group 1 Automotive announced an 11.8% increase in dividend to $0.19 per share. In addition, the company increased the share repurchase authorization to $100 million.
In the third quarter of 2014, Group 1 Automotive repurchased 230,200 shares at an average price of $73.09 for a total of $16.8 million. As of Sep 30, 2014, it had around $37.7 million shares remaining under the prior share repurchase authorization.
Acquisitions & Dispositions
During the third quarter, Group 1 Automotive acquired a Chevrolet franchise and Mazda franchise in Houston, TX; a Mercedes-Benz franchise and Sprinter franchise in the greater metropolitan area of San Antonio, TX and a Mercedes-Benz franchise in Campo Grande, the capital of the Brazilian state of Mato Grosso do Sul. The company expects that these franchises will generate around $370 million in annual revenues.
In Sep 2014, Group 1 Automotive disposed two dealerships, Hassel BMW MINI and Mercedes-Benz of Massapequa located on Long Island, NY. The company also disposed the owned real estate associated with both these dealerships, which generated around $260 million in revenues in the trailing 12 months. In the same month, Group 1 Automotive divested a Volkswagen franchise in Holiday, FL, which generated revenues of $15 million. Additionally, the company plans to dispose of three Renault stores in Brazil. In Jul 2014, Group 1 Automotive disposed its Honda dealership in Freehold, NJ. This dealership generated $65 million in annual revenues.
In the first nine months of 2014, Group 1 Automotive acquired 12 franchises worldwide that are expected to generate approximately $680 million in annual revenues. The company also disposed of seven franchises that generated trailing-twelve-month revenues of $390 million.
VALUATION
Currently, shares of Group 1 Automotive are trading at 14.0x our 2014 EPS estimate of $5.56. The company’s current trailing 12-month earnings multiple is 14.6x, compared with the 19.8x average for the peer group and 18.6x for the S&P 500. Over the last five years, shares of Group 1 Automotive have traded in a range of 10.1x to 17.1x trailing 12-month earnings. The stock is trading at a discount to the peer group, based on forward earnings estimates. The current P/E, which is close to the mid point of the historical range, is at a 34% discount to the peer group for 2014. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the overall market. Our target price of $82.00, which is 14.7x our 2014 EPS estimate, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of GPI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114companies covered: Outperform- 15.6%, Neutral- 78.1%, Underperform – 5.7%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / GPI | Page 1