What: Shares of auto retailer Asbury Automotive Group, Inc. (ABG -1.10%) fell 12% on Wednesday after it reported third-quarter earnings.
So what: Revenue of $1.72 billion was up 14% from a year ago, and net income rose 57% to $51.1 million. On an adjusted basis, which pulls out one-time items, the company earned $1.43 per share, which was a penny ahead of estimates, and revenue also beat estimates of $1.66 billion.
Now what: Usually when a company beats estimates it's good news for the stock, but this time investors are focusing on shrinking margins. Management said that same-store revenues were up 8% in the quarter, but gross profit was up just 6%. Especially in the auto business, if revenue is growing, you should be able to leverage your costs to have higher margins, which isn't what Asbury is seeing.
I think the sell-off was probably overdone, and with shares trading at 12 times forward earnings, there's nice value in the shares. But keep an eye on margins in coming quarters, because if the margin pressure continues it could be bad news if auto sales swing lower, as they do from time to time.
