On Thursday, Morgan Stanley raised its rating on shares of Group 1 Automotive Inc . (NYSE: NYSE:GPI) from Underweight to Equalweight, also increasing the price target to $255 from $200. The adjustment comes after a review of the company's fourth-quarter earnings and market conditions.
The firm noted the automotive market's resilience, with new car pricing maintaining strength, even reaching record highs for Average Selling Price (ASP) despite challenges such as higher interest rates, recovering inventory, and rising incentives.
This trend was evident in new vehicle gross profit units (GPUs) generally surpassing expectations, though used vehicle volumes fell short due to elevated ASPs leading to affordability issues for buyers.
Morgan Stanley observed a "used buyer's strike," attributing the phenomenon to higher-than-anticipated ASPs that have intensified vehicle affordability pressures. The tight supply has also contributed to restricted volumes in the used car market.
The analysis further revealed that cost control is becoming more challenging for franchise dealers. Among six dealerships reviewed, five posted higher costs in relation to gross profit, indicating diminishing sales, general, and administrative (SG&A) leverage.
Despite these challenges, some dealerships managed to outperform on the bottom line, aided by stock buybacks and favorable tax effects. However, only two out of six dealers achieved this, with overall earnings per share (EPS) being slightly weaker compared to market expectations.
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