457 Million Reasons to Buy This Auto Stock

When you find an investment manager overseeing $1.2 billion, it warrants further investigation when they bet one fifth of their entire portfolio on a single stock. Yet that’s exactly the conviction that Impactive Capital demonstrated by betting 20.4% of their portfolio on an automotive retailer.

Amid the universe of thousands of stocks, what is it that Impactive portfolio managers saw in Asbury Automotive that motivated them to allocate $457 million of their fund to it?

Key Points

• Asbury Automotive received a huge vote of confidence from Impactive Capital that has over 20% of their portfolio in this single stock.
• One reason for the enthusiasm is management’s share buyback scheme signaling insiders are bullish about the firm’s prospects.
• A valuation analysis and key metrics validates the thesis of the billion dollar investment manager that Asbury has serious potential.

Why This Automotive Retailer

There is so much to like about Asbury Automotive financials that it’s almost hard to know where to begin. For one, analysts are very bullish about the firm’s prospects and have a consensus target of $266 per share on the firm. But we think that might be seriously underestimating fair value, and that Impactive Capital have spotted the same opportunity.

After examining the cash flows of the company, backed up by very strong earnings, it seems Asbury could in fact rise much higher to around $300 per share, which would correspond to almost 40% upside opportunity.

But wait, there’s more.

A Deeper Dive

When we looked into the financials, it’s clear what has excited Impactive. The Board of Directors authorized a share repurchase agreement of $250 million, signaling their deep conviction in the valuation argument for the firm too. And with the share price up just 9% over the past year, underperforming the broader based market by a factor of about two, the upside is now even higher.

Plus, and quite remarkably for a firm with such strong earnings, Asbury Automotive is trading at a price-to-earnings ratio of just under 5x. That further cements the valuation argument. And it gets better when identifying the return on invested capital of almost 12% that signals there is no sign of disruption anytime soon. Quite the contrary, Asbury Automotive appears to have a pretty solid moat and competitive advantage.

Time to Buy Asbury?

Sometimes, no matter how dismal a story, a stock is trading just too low relative to fair value to ignore. For Asbury that is evident by comparing at the $4.33 billion market capitalization against revenues of $14.6 billion, resulting in a price to sales ratio of 0.3x. With a PEG of just 0.24x, it’s clear the company’s earnings multiple is low relative to profits too.

While sentiment has dimmed on Asbury with two analysts revising their guidance lower for the upcoming period, the positives far outweigh the negatives at this time, leading to a compelling value play.