AutoNation (AN), is the largest automotive retailer in America. As of the end of 2013, AutoNation had 269 vehicle franchises located within 228 storefronts with a geographical focus on metropolitan regions within the southern US. Through these locations, AutoNation sells 33 different new vehicle brands, with 9 brands — including Toyota (TM), Ford (F) and General Motors (GM) — representing 95% of new vehicle sales.
In addition to selling cars, AutoNation offers a diversified range of automotive services through its retail locations, which include automotive parts and service, financing and insurance. Sales and gross profit by product or services are:
- New vehicles: 57% of sales, 22% of gross profit
- Used vehicles: 24% of sales, 12% of gross profit
- Parts and service: 15% of sales, 40% of gross profits
- Finance and insurance: 4% of sales, 25% of gross profits
- Other: 0% of sales, 1% of gross profits
AutoNation manages the business through three operating segments based on brands: Domestic, Import and Premium Luxury. AutoNation’s business strategy is threefold:
- Create an online and offline automotive retail experience for its customers
- Leverage its size and scale to drive operating efficiencies
- Build a powerful retail brand through consistent execution that will drive customers to its stores
AutoNation Earnings Summary
AutoNation started 2014 great, reporting fourth-quarter operating income increasing 20% to $203 million and expecting US vehicle sales to increase 7% by volume for the year. In its first quarter, AutoNation posted a 12% increase in operating income to $189 million as strong demand continued. AutoNation also announced the expansion of its digital footprint in order to reduce its dependence on third-party lead generates such as AutoTrader.com or TrueCar.com.
These leads represent the largest marketing expense for AutoNation, and prices have continued to rise year-after year as the lead generators have strengthened their brands. The increased cost of focusing on digital showed up in costs in the second quarter, with AutoNation missing analyst estimates and AN stock dropping more than 8%. AutoNation’s operating income increased 9% to $198 million, and there was continued strong demand at the AutoNation locations.
AN – Stock Analysis
AutoNation plans on spending $100 million over the next several years to ramp up its internet presence, helping to decrease the impact of the costly third-party marketing channel. In addition, AutoNation announced earlier in the year that it planned to hire 400 more service technicians, which suggest that the higher-margin parts and service component of its business may be become a bigger part of overall sales.
With a focus on moving to a larger online presence, the focus on parts and services makes sense, as customers would be more easily able to schedule routine maintenance and repair work through the online medium.
Analysts currently have a consensus 12-month price target of $53 — roughly in line with the current price of AN stock — with a range from $41 to $72. AutoNation has significantly under performed the S&P 500 over a 1-year period. AutoNation has a P/E of 16.4 compared to an industry average of 17.3 and offers no dividend.
Higher industry volumes, driven by increasingly favorable macroeconomic variables, should help AutoNation’s sales and profits over the next year. AutoNation currently has a 5-year expected PEG ratio of 0.92, placing it close to “neutral” range, meaning that buy and hold investors would be best to build their position on continued stock price pull-backs but not seek to aggressively add to their positions in the stock at this juncture.
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As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
