Group 1 Auto Feels U.S. Drag
Group 1 Automotive, Inc. (GPI) has generated most of its recent growth through acquisitions. The recently reduced interest rates will provide further growth for the company. GPI aggressively manages its costs and has dealerships with above-average profitability. Further, the company has a strong geographical presence.
However, a difficult car sales environment is affecting revenues. The company anticipates a modest 1-2% growth in revenues for 2008. Thus, we rate the stock a Hold with a six-month target price of $24.50.
Group 1's strategy for success is founded on decentralized operations, industry-leading customer service, disciplined acquisition growth, and geographic and brand diversity. At the same time, integration and consolidation provide cost savings and revenue synergies.
GPI expects the 14 franchises it acquired in 2007 to generate annual revenues of approximately $702.4 million in 2008. The company plans to dispose of underperforming stores. Group 1 has set a target of acquiring franchises with approximately $300 million annual revenues in 2008. In May, GPI acquired Tate BMW/MINI in Annapolis, which is expected to generate $73.0 million in estimated annual revenues.
Currently, the company focuses on improving same-store sales and higher-margin business such as parts and service as well as used vehicles. The management expects an EPS growth of 15%.
Shares of Group 1 are trading at a forward P/E multiple of 6.9x 2008 EPS estimate of $3.26. Standard & Poor's Ratings Services lowered Group 1 Automotive, Inc.'s corporate credit rating due to challenging North American sales conditions but raised its outlook to Stable from Negative. We believe that with weak same-store sales data, yet decentralized operations and excellent geographic reach, the stock should trade at a multiple of 7.5x 2008 EPS.
Visibility Tough for AATI Tech
We reiterate our Hold recommendation on the shares of Advanced Analogic Technologies (AATI), which is a supplier of power management semiconductors for mobile consumer electronic devices, such as wireless handsets, notebook and tablet computers, smartphones, digital cameras and personal media players.
Despite a top-line miss for the first quarter, the company sees more traction into the Asian handset market after several new products have recently been introduced. These products are of the high margin variety and have the potential to ramp up company margins.
While there is a positive backdrop of growth in the consumer electronic market, increased litigation expenses will remain a risk. The change in LG's (LG) inventory chain makes it harder to forecast sales from AATI's largest customer, and opens the company up to inventory risk.
AATI shares are trading at a 15.7x multiple of our 2009 earnings estimate (P/E). We are setting a target price of $10.00, which corresponds to a P/E multiple of 19.9x 2008 EPS after subtracting for cash.
Target $3 on Hold-Rated Santarus
Although we are pleased to see that Santarus, Inc. (SNTS) is working on strengthening its presence in the gastroesophageal reflux disease (GERD) market, we remain concerned about the intense competition in this market. We believe that investor focus will remain on prescription trends for heartburn drug Zegerid over the next few quarters. We recommend waiting on the sidelines until visibility improves, and maintain a Hold rating on the shares.
Santarus recently announced that it intends to terminate its co-promotion agreement with Otsuka America Pharmaceutical Inc. for Zegerid. Given the reduced sales force promotional efforts by other companies in the proton pump inhibitor market, Santarus should be able to maintain its share in its target audience despite the termination.
Moreover, the elimination of royalty payment obligations to Otsuka should bring Santarus a step closer to profitability. Based on our revised model, we see the company posting positive EPS in 2009.
Santarus shares have been on a roller-coaster ride over the past few quarters.
Going forward, we believe that the Zegerid patent infringement lawsuit against Par Pharmaceutical Inc (PRX) will remain an overhang on the shares.
In our opinion, the company needs to reduce its dependence on the Zegerid line of products and should try to boost growth through the in-licensing or acquisition of suitable candidates. Our $3 target price is based on a P/S ratio of 1.3x our 2008 revenues.
