AutoNation Earnings: Profit Normalization Journey Continues

AutoNation finished 2023 with a good fourth quarter that, like its peers, continued to show profits coming down from record levels induced by the chip shortage inflating new vehicle profitability. We maintain our fair value estimate but will reassess all modeling inputs after we roll our model for the 10-K. A fair value estimate increase is possible as we will model 2024 share repurchases given the company’s history of ample buybacks. Full-year buybacks totaled $863.6 million, while fourth-quarter spending was $151.2 million at about $137.45 per share. In 2023, the company bought back 13% of its stock, and since year-end 2020 it has repurchased over 50%, so 2024 buybacks are almost certain, in our view. As of Feb. 9, about $320 million of authorization remains. Regarding acquisitions, management said that sellers' asking prices are based more on 2022 profit levels as sellers focus on trailing 12-month levels, so we expect more buybacks while management waits for sellers to reset expectations lower. Year-end liquidity was $1.5 billion, nearly all from the credit line, and the firm has room within its debt covenants to increase leverage should it need to for an acquisition.