Group 1 Automotive, Inc. (GPI) has generated most of its recent growth through acquisitions. The recently reduced interest rates will provide further growth to the company. Group 1 manages its costs aggressively and has dealerships with above-average profitability.

Further, the company has 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 target of $23.

Group 1 acquired 14 import/luxury franchises in 2007 including five BMW, four BMW Mini and three Mercedes-Benz franchises. The company expects these franchises to generate annual revenues of approximately $702.4 million in 2008, exceeding its 2007 acquisition target of $600 million. In addition, Group 1 disposed of 15 underperforming franchises with annual revenues of $154.8 million during 2007.

The company has set a target of acquiring franchises with approximately $200 million annual revenues in 2008. In the first half of 2008, Group 1 completed acquisition of $90.2 million in estimated annual revenues. On August 15, Group 1 Automotive announced that its Board of Directors has authorized a share repurchase program of up to $20 million of the company’s common stock.

Group 1 is operating in a difficult industry environment. Falling domestic volumes and higher SG&A expenses continue to put pressure on margins. Oversupply of domestic new vehicles remains the major concern in the industry. Domestic brands constitute 30% of the revenue. In 2008, auto pricing will remain highly competitive. Management feels that pressure on gross margins will continue and that automaker incentive programs will drive sales. Overall, the company expects revenues to be up only 1-2% in 2008.

Read the full analyst report on GPI

“GPI” Free Stock Analysis: Buy? Sell? Hold?
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