$ABG

Major Franchise Auto Dealers' 2027 Earnings Could Take Hit if Downside Scenario Plays Out, UBS Says

Major US franchise auto dealers could face earnings pressure next year if a downside scenario plays out amid a "relatively muted" growth backdrop, UBS Securities said Monday.The downside scenario is based on the brokerage's recent discussions with investors. It includes, among other things, expectations for new and used unit growth to be flat into 2027, compared with consensus views of a gain of 3% and 4%, respectively, for the group in UBS's coverage.Other key input includes parts and service growth outlook of 2% next year versus the consensus for an increase of 5% for the group, according to UBS. The analysis covers AutoNation (AN), Sonic Automotive (SAH), Asbury Automotive Group (ABG), Lithia Motors (LAD), and Group 1 Automotive (GPI).Using these assumptions, UBS sees potential downside to 2027 consensus earnings per share views between 6% and 10% for the group, if the downside scenario were to play out, the brokerage said in a note to clients."Consensus has units higher in both new and used for the group in 2027 in what some expect to be a relatively muted growth environment," UBS analysts Robert Saltzman and Joseph Spak said, adding that parts and service growth could also slow from mid-single-digit levels after "significant warranty tailwinds" in recent years.Same-store new and used vehicle sales have underperformed US light vehicle and used retail sales by about 3% each over the past few quarters, according to the note.The structural durability of backend operations like parts and service, as well as financing and insurance remains underappreciated, though dealers will need improving unit sales and stronger service growth to boost investor confidence, UBS said."Given where multiples are currently trading after the (nearly) 2 weeks post-EPS sell-off, we believe a lot of this pessimism is currently priced in," Saltzman and Spak wrote. "We acknowledge there are a variety of ways to offset these potential headwinds, including (selling, general, and administrative) cost improvements, accretive M&A, (and) share repurchases to support EPS growth."UBS expects AutoNation to be the least affected by the scenario, while Sonic Automotive appears the most vulnerable."We continue to prefer idiosyncratic stories tied to growth and strong buybacks to support EPS in the current operating environment," the brokerage said.Price: $207.07, Change: $-2.35, Percent Change: -1.12%