On Jan 22, 2015, we initiated coverage on Group 1 Automotive Inc. (GPI). This stock had posted a positive earnings surprise of 9.03% in the last reported quarter.
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, surpassing the Zacks Consensus Estimate by 13 cents. Revenues increased 12.2% year over year to $2.63 billion, beating the Zacks Consensus Estimate of $2.58 billion, driven by strong performances across all its businesses.
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. In Sep 2014, Group 1 Automotive acquired a Mercedes-Benz dealership in Campo Grande, Brazil. Also, in Aug 2014, the company acquired a Mercedes-Benz dealership in Boerne, TX, which will likely generate annual revenues of approximately $135 million.
Group 1 Automotive has a strong balance sheet, which allows the company to actively pursue capital deployment strategies to boost shareholder value. In Nov 2014, the automotive retailer announced an 11.8% increase in dividend to 19 cents per share. In addition, the company increased its share repurchase authorization to $100 million.
However, Group 1 Automotive faces competition from other franchised automotive dealerships, private market buyers and others. Rising competition and increasing price transparency can lead to lower selling prices, and adversely affect the company’s profitability.
In addition, Group 1 Automotive’s new vehicle sales are dependent on certain major automakers including Toyota Motor Corporation (TM), Nissan Motor Co. Ltd. (NSANY) and Honda Motor Co., Ltd. (HMC). These automakers may be adversely affected by economic downturns or other events, which will affect the manufacturers’ ability to profitably design, sell, produce or distribute new vehicles. This, in turn, will have an unfavorable impact on Group 1 Automotive’s business, as it is directly dependent on these manufacturers for its vehicle inventory.
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