I’ve always believed that the best way to make money in the stock market is to buy shares of quality companies when it seems nobody else wants them. If you believe that as well, is there a case to be made for buying AutoNation Inc. (AN) shares at current levels?
Buying a car is likely to be one of the last things on consumers’ minds right now (just after buying a new house), and the share price of AN reflects that.
We all know what’s happening with the economy; that people are losing jobs, credit is seizing up and home values are falling precipitously. Current conditions do not suggest that it’s a good time to buy retailers, much less one that sells cars.
That said, AN is taking steps to combat the weak economy and should be well positioned when growth returns. The company is on track to achieve its previously-announced $100 million cost-reduction plan and is looking at future cost-cutting opportunities beyond that amount.
AutoNation has alread cut jobs and sold underperforming stores, reduced advertising spending and cut its vehicle inventory, which is down by about 6,600 units since the beginning of the year.
The company has also shifted its capital allocation strategy from share repurchase to debt reduction. It has reduced debt by $589 million so far this year and is planning a further reduction of $500 million.
The result of these actions is to lower its interest expense by $8.7 million in its recently completed third quarter from a year ago and going forward. AN remains in compliance with all of its financial covenants, which is critical to those thinking the company may be dealing with a bankruptcy scenario.
AN believes the actions taken by the Federal Reserve and Treasury Department of late will help loosen the credit markets and that the recent decline in gasoline prices is further good news for the consumer. Once housing begins to stabilize and credit becomes more widely available, the company expects to see increased signs of stabilization in the U.S. economy.
As the nation’s largest auto retailer, AutoNation has been hit hard by the current economic woes. In the third quarter, non-cash charges for goodwill and franchise impairment contributed to a loss of $1.41 billion, or $7.99 per share. Excluding those items, earnings came in at 25 cents per share.
Revenue fell 21 percent from a year ago to $3.5 billion. That said, AN said it fared better than its peers as industry-wide new vehicle sales fell 31 percent in the quarter while AN’s fell 24 percent.
Diversity may be the key to the company’s rebound. It sells 38 different makes of vehicles, both new and used, and also offers maintenance and repair services, extended service contracts and aftermarket products.
They are not solely dependent on Detroit like some auto dealers. AN also arranges for financing through third party finance sources, which should help in this tight credit environment.
New vehicles account for about 59 percent of sales, while used vehicles account for about 23 percent. In a tough market, the sales of used vehicles and high margin maintenance services may surge.
I think AN is ultimately a winner in the long term. If you can handle the volatility and the risk, owning AN now may make sense.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
