Company: Asbury Automotive Group Inc. (ABG)
Business: Asbury Automotive Group is an automotive retailer in the United States. It offers a range of automotive products and services, including new and used vehicles; and vehicle repair and maintenance services, replacement parts, and collision repair services. The company also provides finance and insurance products, including arranging vehicle financing through third parties; and aftermarket products, such as extended service contracts, guaranteed asset protection debt cancellation, prepaid maintenance, and credit life and disability insurance. As of Dec. 31, 2020, the company owned and operated 112 new vehicle franchises representing 31 brands of automobiles at 91 dealership locations and 25 collision centers in the United States.
Stock Market Value: $3.5B ($184.17 per share)
Activist: Impactive Capital
Percentage Ownership: 5.02%
Average Cost: $105.34
Activist Commentary: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar, both formerly of Blue Harbour. In just three years, they have made quite a name for themselves as ESG — environmental, social and governance — oriented activists. Impactive will use all of the traditional operational, financial and strategic tools that activists use, but will also implement ESG change that they believe is material to the business and drives profitability of the Company and shareholder value.
Impactive Capital has reported a 5.02% interest in ABG for investment purposes.
Behind the Scenes:
This is one of Impactive’s first positions when they started the fund – they bought it in the $60’s and kept adding to it. The company has an attractive recurring revenue razor/blade model, with the sale of new and used cars being the “razor” and the parts and services business being the “blade”. The company has compounded earnings greater than 25%, has a 10% free cash flow yield, and there are many opportunities for growth to allow it to continue to compound earnings at 25%+ well into the future.
First, Asbury Automotive implemented Clicklane to give it online e-commerce capabilities, which can allow it to compete with Carvana, further driving growth. Second, there are opportunities for strategic acquisitions to grow revenue and earnings, and the company has shown that they can be disciplined acquirers of the right businesses. For example, in December 2019, the company entered into an agreement to acquire the Park Place business for approximately $1 billion, negotiating a very favorable $10 million termination right, which they ended up paying when they terminated the agreement. Six months later, the company reengaged with Park Place under more favorable pricing and more flexible financing terms for a new purchase price of $889.9 million. Third, the company’s parts and services business has been underearning because of pandemic related slowdowns and labor shortages preventing it from operating anywhere near capacity.
Impactive has an impressive track record of providing solutions for operational problems like this that also further ESG considerations. For example, to remedy the problem of labor shortages, the company has been reaching out to female-led companies to bring more women mechanics in the collision centers. To accomplish this, they have implemented two shifts per day to better accommodate for child care, built separate locker rooms and bathrooms for women and men and became the first publicly-listed auto dealer to offer maternity leave. While 98% of mechanics are male, ABG can solve their labor problem by hiring a significant portion of the other two percent and hopefully grow the percentage of female mechanics in the workplace. If that ratio went from 98/2 to 90/10, it would add a huge amount of labor to the mechanic pool. These changes to its labor force could help accelerate growth in its most profitable business segment – parts and labor – from the mid-to-high single digits where it is today to double digits. This is a perfect example of Impactive’s investment thesis – using ESG to drive value creation and profitability.
Impactive Capital has been owners of this stock for years, but very quietly. While they like to take board seats at companies, that is not likely to happen here for several reasons. First, the company has a stellar management team that has been operating it impressively over the years generating significant value for shareholders. Second, the board has shown that it is diligent and disciplined in focusing on shareholder value – the negotiation and renegotiation of the Park Place acquisition is evidence of that. And third, Impactive seems to enjoy a great relationship with the board and management who have shown that they are receptive to considering reasonable suggestions from shareholders.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Asbury Automotive Group is owned in the fund.