Over the past couple of weeks, value stocks are once again moving higher. One value stock, in particular, has the potential to move higher in the weeks and months ahead. Group 1 Automotive, Inc. (GPI) is one of the leading automotive retailers in the world, with operations located in the United States, U.K., and Brazil.
In fact, it owns and operates 48 collision centers and 188 automotive dealerships across 242 franchises, offering 32 brands of automobiles altogether. One theme that I have noted in quite a few of my articles was the used car bubble. Due to the pandemic and a global chip shortage, there weren’t as many new cars for sale. That made used cars highly popular. It has also increased the need for parts and repair.
These are services that GPI offers. The company generates revenue from used and new vehicle sales, finance, insurance, automotive repair, and maintenance. The company reported a quarterly record for the second quarter. Adjusted diluted EPS of $10.31 beat the consensus estimate and more than tripled from second-quarter 2019’s $2.83.
Management is still seeing low U.S. new-vehicle inventory, and these low inventories mean more emphasis on the used-vehicle business. This leads to more parts and service revenue, which is quite lucrative for the company. Parts and services provide a large portion of GPI’s gross profit, even though they are a small part of overall revenue.
In fact, the company’s gross margins have benefited from improved profitability in both its new vehicle and used vehicle sales segments. GPI also has one of the strongest earnings track records in U.S. auto retail, beating estimates in 14 of the past 16 quarters. Plus, its recent resumption of share repurchases should help boost its EPS.
The company should continue to benefit from used car and part sales. GPI has implemented a variety of initiatives to help drive sales. For instance, the company is boosting its omnichannel efforts by enhancing its customer scheduling appointment system and its online retailing initiative, the AcceleRide platform.
Most importantly, the stock is highly attractive at its current price, especially following a pullback from record-high levels in early May. Both the stock’s trailing P/E and forward P/E are around 6, which is a meager figure. If we consider its valuation based on an analyst price target, the stock has a potential upside of 77%.
So, it’s no surprise that GPI had a Value Grade of A in our POWR Ratings system. The company also has an overall grade of B, translating into a Buy rating. GPI also has a Momentum Grade of B and a Quality Grade of B due to the stock’s recent performance and a solid balance sheet. Its current ratio of 1.3 indicates the company has more than enough liquidity to handle short-term obligations. GPI is also ranked #5 in the Auto Dealers & Rentals industry.
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David Cohne
Chief Value Strategist, StockNews
GPI shares were unchanged in after-hours trading Wednesday. Year-to-date, GPI has gained 31.67%, versus a 19.47% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.
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