Hurricane Tailwinds May Have Blown Group 1 Auto Into An Unattractive Valuation

Group 1 Automotive, Inc. GPI reported better-than-expected earnings Oct. 26 and the stock traded sharply higher.

The Analyst

The Buckingham Research Group's Glenn Chin downgraded the stock from Buy to Neutral and increased the price target from $77 to $86.

The Thesis

Hurricane season and third quarter earnings had a positive impact on the stock price of Group 1, but the risk-reward seems balanced now, said Chin. (See Chin's track record here.) 

In the best-case scenario, it could move to $95, while in the worst case scenario, it could drop to $61, the analyst said.

Following its dramatic 50 percent post-hurricane rise, Group 1 Automotive has closed the valuation gap versus the peer group and now trades in-line with its three-year average of 10.7x.

The $86 price target is based on an 11.0x P/E multiple on Chin's revised 2018 EPS estimate of $7.84. The stock is currently trading at 10.5x/10.2x Chin's 2017 and 2018 EPS estimates, respectively.

A significant reduction in the U.S. corporate tax rates could meaningfully increase net income for the company, Chin said. After the impact of hurricane recovery passes, the U.S. seasonally adjusted average rate will likely revert to the mid-16M level, the industry was tracking at prior to the hurricanes, the analyst said.

Price Action

Group 1 Automotive was trading down 1.77 percent at $78.22 at the time of publication. 

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