This article is part of our Rising Star Portfolios series.

I purchased shares of Asbury Automotive (NYSE: ABG) for my Rising Stars portfolio for one simple reason: Americans aren't buying enough cars. The U.S. scraps an estimated 14.8 million cars a year, and for each of the past three years, purchases have fallen well below that figure. The recovery may still be tentative, but sooner or later, Americans will need to buy more cars -- or revert to horses and buggies.

Better yet, Asbury enjoys stable and recurring cash flow from parts and services. It recently renegotiated credit agreements. It has the potential to wring costs from its bloated cost structure. And, at 11 times trailing cash flow (at the time I bought in), its valuation didn't seem to reflect any of those prospects. All those factors made Asbury shares a compelling buy.

Gas for your portfolio?
The quarterly numbers seem to back up that thesis. Total revenue jumped 22%, new vehicle same-store units increased 23%, used vehicle same-store units grew 22%, and operating profits increased 34%. Finance and insurance revenue, which is tremendously profitable -- Asbury collects a commission, but retains no liability -- grew 34%. That's pure profit.

Thank two key factors for that quarterly performance. First, sales have improved for most automotive retailers, as AutoNation (NYSE: AN), Penske (NYSE: PAG), Sonic (NYSE: SAH), and CarMax's (NYSE: KMX) results attest. Second, Asbury continues its commitment to operational improvements. On the latter count, the proof's in the numbers: Selling, general and administrative costs declined to 76.4% of gross profits, from 78.8% prior-year figures, owing to Asbury's cost-reduction efforts and operating leverage on sales increases.

All in, it was a great quarter, and the shares moved 6% on the news.

Regular or supreme?

Here's the kicker: Shares still look cheap to me. Consider a few things in context:

  • The number of dealerships has dramatically declined from pre-credit crisis days, since the GM/Chrysler bankruptcies forced a rash of dealer closures. That leads to more sales for existing dealerships.
  • Asbury's implementing a common dealer management system and a CRM platform. If its peers' results are any guide, these efforts could yield a 10%-20% increase in cash flow.
  • Unbelievably, by my math, the market still isn't pricing a the long-term recovery to car sales.

These  shares trade at roughly 11 times my measure of normalized free cash flow. In my book, that makes them a compelling investment.

Agree? Disagree? Join me on my discussion board, where we're still discussing all things Pontiac (and maybe a little bit about stocks besides).

Michael Olsen doesn't own shares of Asbury Automotive. While he'd like to own a new car, his insurance company is not so fond of the idea. The Fool owns shares of Asbury Automotive Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.