Browse
Log in / Register
Share
April 18, 2025 – UBS analysts have raised a caution flag on Asbury Automotive Group (NYSE:ABG), warning that the dealer giant could face earnings headwinds by 2027 if new vehicle unit sales remain flat and parts-and-service growth decelerates. The note, which surfaced earlier this week, adds to a growing list of sector-wide concerns around rising inventory levels and a potential pullback in consumer spending on big-ticket items.
Yet beneath the bearish headline, the math tells a different story. Asbury’s most-watched fair value estimate sits at $254.20 per share – roughly 18% above its last close of $208.54. This gap suggests that much of the UBS downside scenario may already be priced in, leaving room for patient investors who can look past short-term noise.
The UBS scenario assumes that Asbury’s core auto retail business stalls: unit sales hold steady at current levels, and the historically steady parts-and-service segment – which typically provides a buffer during downturns – grows at a slower pace. If both play out, the firm projects 2027 earnings per share could fall short of consensus estimates by a double-digit percentage.
But industry insiders point out that the UBS model may be too conservative. In an exclusive interview with Simply Wall St, a former Asbury regional general manager who now runs a multi-franchise dealership in the Southeast said: “The parts-and-service business is far more resilient than what Wall Street models show. Asbury’s investment in its collision centers and digital service scheduling is already driving higher customer retention. I’d be surprised if growth slows meaningfully before 2028.”
Moreover, the UBS report did not factor in potential benefits from the Federal Reserve’s recent rate cuts, which have already started to lower floor-plan financing costs for dealers. Lower interest expenses could offset some margin pressure, especially if Asbury continues to reduce its debt load.
Asbury’s share price has been a mixed bag over the past year. The stock surged 17.5% over the 90 days through mid-April, but year-to-date it is still down 11.2%. The one-month return is negative 5.4%, showing that momentum cooled after the UBS warning hit the wires.
The broader auto retail sector has also been under pressure. Rivals like Lithia Motors (LAD) and Group 1 Automotive (GPI) have seen similar pullbacks, reflecting a market that is pricing in a softer consumer environment. However, according to data from the National Automobile Dealers Association (NADA), average dealership profits per new vehicle remain above pre-pandemic levels, suggesting that the floor for earnings may be higher than bears assume.
The fair value narrative that drives the 18% undervaluation thesis hinges on three key assumptions: first, that Asbury’s revenue growth will accelerate as it integrates acquisitions and expands its footprint; second, that operating leverage will improve net margins; and third, that share buybacks – which have been aggressive in recent quarters – will continue to shrink the float.
To put the numbers in perspective: if Asbury hits the projected earnings trajectory by 2027, it would trade at roughly 8x earnings, compared to its historical average of 10x. That multiple gap alone could push the stock higher even without any earnings beat.
Of course, the bullish case faces real risks. Asbury carries higher leverage than some peers, having financed several large acquisitions over the past two years. If used-vehicle supply remains tight and new-vehicle discounts narrow, the company could struggle to maintain its net margin. The UBS report also highlighted that a prolonged plateau in unit sales could limit the upside from operational improvements.
For investors weighing the UBS warning against the valuation discount, the key is to separate the macro risk from Asbury-specific fundamentals. The dealer group has a strong track record of generating free cash flow, and its recent divestiture of underperforming stores has improved the quality of its portfolio. Meanwhile, the company’s share repurchase program has been a consistent boost to EPS, even when revenue growth is modest.
A deeper dive into the Simply Wall St narrative reveals that the 18% undervaluation does not ignore the UBS scenario – it simply suggests that the market has already discounted a similar outcome. The real question is whether the company can execute better than the worst-case scenario assumes.
Asbury is scheduled to report its next quarterly earnings in late April. Analysts will be closely watching same-store sales, service revenue, and management’s commentary on 2025 guidance. Any signs that parts-and-service growth is holding up better than expected could trigger a reversal of the recent bearish sentiment.
For those who want to explore beyond Asbury, the Simply Wall St screener offers several curated lists. Investors can scan 53 high-quality undervalued stocks that may offer a margin of safety, or look at 80 resilient stocks with low risk scores for capital protection. The 19 undiscovered gems list is also worth a look for those seeking earlier-stage opportunities.
This article by Simply Wall St is general in nature and does not constitute financial advice. It is based on historical data and analyst forecasts, and does not factor in the latest company announcements or qualitative material. The views expressed are not a recommendation to buy or sell any security. Past performance is not indicative of future results. Simply Wall St does not hold a position in any of the stocks mentioned.
Have feedback on this article? Concerned about the content? with us directly. Alternatively, email %20from%2018th%20April%202025)
