Earnings estimates have been soaring for Group 1 Automotive (GPI) after the company delivered strong Q4 results on February 5. Both revenues and earnings easily surpassed the Zacks Consensus Estimates due to strength in both new and used vehicle sales, as well as expanding profit margins.
Group 1 is a Zacks Rank #1 (Strong Buy) stock. The valuation picture looks very reasonable too with shares trading at 12x forward earnings and 0.2x sales.
Group 1 Automotive owns and operates 150 automotive dealerships, 195 franchises, and 38 collision centers in the United States, the United Kingdom and Brazil. 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.
In 2014, the company’s revenue was divided as follows:
New Vehicle Sales: 58%
Used Vehicle Sales: 27%
Parts & Service: 11%
Finance, Insurance & Other: 4%
Interestingly, while ‘Parts & Service’ made up just 11% of total revenue last year, it accounted for 41% of total gross profit due to significantly higher margins than in both new and used vehicle sales.
Fourth Quarter Results
Group 1 delivered better-than-expected fourth quarter results on February 5. Adjusted earnings per share came in at $1.67, crushing the Zacks Consensus Estimate of $1.31. It was a 55% increase over the same quarter last year.
Total revenue rose 11% year-over-year to $2.539 billion, beating the consensus of $2.479 billion. New vehicle revenues increased 9.9% on 8.4% higher unit sales. New vehicle gross profit increased 4.4% per unit to $1,973. Retail used vehicle revenues jumped 15.6% due to a 15.1% increase in unit sales. And Parts & Service revenue rose 9.5%.
Overall, the adjusted operating margin improved 60 basis points to 3.5%.
Estimates Rising
Following strong Q4 results, analysts revised their estimates significantly higher for Group 1. This sent the stock to a Zacks Rank #1 (Strong Buy).
The 2015 Zacks Consensus Estimate increased from $6.49 before the report to $6.80. The 2016 consensus increased from $7.09 to $7.58 over the same period.
Group 1 is not the only auto retailer seeing positive estimate revisions these days. In fact, the ‘Retail/Wholesale Auto/Truck’ industry ranks in the top 10 out of 265 industries that Zacks ranks based on earnings momentum.
Other auto retailers like Asbury Auto Group (ABG), AutoNation (AN), Lithia Motors (LAD), and Sonic Automotive (SAH) all sport either a Zacks Rank of 1 (Strong Buy) or 2 (Buy).
One of the reasons for this has been the strong rebound in new car sales from the depths of the Great Recession.
Reasonable Valuation
The valuation picture looks reasonable for Group 1. Shares trade at 12x 12-month forward earnings, a discount to the industry median of 13x. Its price to sales ratio of 0.2 is also below the industry median of 0.3.
The Bottom Line
With favorable industry trends, rising earnings estimates and reasonable valuation, Group 1 Automotive offers investors a lot to like.
Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.
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