Company Reports

Narrow-moat AutoNation reported a good first quarter to start 2024, with diluted EPS down 26% year over year to $4.49 but still ahead of the LSEG consensus of $4.27. We are raising our fair value estimate to $171 from $162 after adjusting our model for how the year has started. The change is from a lower share count after increasing our 2024 share repurchase spending by $200 million to $900 million; better working capital inflows; the time value of money; and a slightly lower tax rate throughout our five-year explicit forecast period.

We believe AutoNation's massive size and economy of scale advantages will allow the company to deliver operating margins often above 4%, and we see upside potential to profits as its AutoNation USA stand-alone used-vehicle stores roll out. There are 23 USA stores as of first-quarter 2024, and long term we expect over 100.

We believe AutoNation's massive size and economy of scale advantages will allow the company to deliver operating margins often above 4%, and we see upside potential to profits as its AutoNation USA stand-alone used-vehicle stores roll out. There are 19 USA stores as of year-end 2023, and long term we expect over 100.

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.

Most automakers reported final sales numbers for 2023 on Jan. 3. Adjusting for one selling day fewer, Wards put the year-over-year December sales increase at 17.3% and the seasonally adjusted annualized selling rate at 15.83 million, up from 13.55 million in December 2022. Full-year sales increased 12.4% to 15.46 million. We think the worst of the chip shortage is finally behind the industry, but we expect some supply shortages in 2024. As inventory continues to recover, we expect incentives as a percentage of average transaction price to keep rising from artificially low levels of barely above 2% in late 2022 (currently just over 5%), which will pressure automaker and dealer margins in 2024 relative to the past two years. Better inventory and U.S. interest rates likely done rising should bring some consumers back to the showroom. Affordability remains a challenge though, so we expect only a small increase in 2024 light-vehicle sales to the high 15 million range.

At the Los Angeles auto show on Nov. 16, Hyundai announced a partnership with Amazon in which, starting next year, some of its dealers will sell new vehicles on Amazon.com. The news sent each of the six franchise dealers and CarMax down about 5%-8%, which we think is a large overreaction predicated on fears of Amazon taking share away from dealers. Such a risk is not even possible on new vehicle sales due to state franchise laws, nor do we think it is likely that Amazon wants to do all aspects of auto retailing such as handling and disposing of trade-ins, service, and finance and insurance offerings. Service is a very underappreciated benefit that dealers provide customers when comparing the traditional auto industry to digital retailing and electric vehicle startups' direct sales formats. Should Amazon directly sell used vehicles someday, CarMax would have more competition, but it also has the ability to sell via brick-and-mortar, digital-only, or any combination of both depending on what the customer wants, something a digital-only retailer cannot offer. Our auto coverage has been implementing omnichannel tools for years and we doubt that any of their management teams are surprised by the Amazon news.

AutoNation reported solid third-quarter results that were typical of the dealer sector, and we see no reason to change our fair value estimate. Diluted EPS of $5.54 fell about 8% year over year but beat the $5.49 Refinitiv consensus. $200 million of buybacks in the quarter helped, and we calculate that EPS using second quarter's share count would have been $5.38. We expect more repurchases in the fourth quarter, but management did say acquisitions are becoming a more attractive opportunity, though sellers' asking prices still need to come down. The United Auto Workers strike did not have much impact on the results beyond some inventory buildup, but we expect fourth-quarter damage should GM and Stellantis not soon reach a tentative deal as Ford did on Oct. 25.

AutoNation's second-quarter adjusted EPS of $6.29 declined 2.9% year over year but still beat the Refinitiv consensus of $5.91. We think the stock falling by over 11% during July 21 trading is from some investors taking profits. The stock increased by about 70% in 2023 before the July 21 drop, after management said on the call that new vehicle profits will continue to moderate as inventory rises. This remark should not be surprising, as inventories have been very low due to the chip shortage, and dealers we cover have long said they expect profits to fall from recent record levels but remain above prepandemic levels. We agree with this prediction because we don't expect inventory to return all the way to prepandemic levels, which should reduce the need for discounting as much as in the past. Therefore, we are leaving our fair value estimate unchanged.

We believe AutoNation's massive size and economy of scale advantages will allow the company to deliver operating margins often above 4%, and we see upside potential to profits as its AutoNation USA stand-alone used-vehicle stores roll out. There are 16 USA stores as of mid-2023, and in April 2021 the firm announced plans to have over 130 by the end of 2026 (more recent language just says over 130 long term), with some in new U.S. markets.

AutoNation reported good first-quarter results given U.S. macroeconomic uncertainty and continues to significantly boost its EPS via share repurchases. Diluted EPS of $6.07 rose 5% year over year and beat the Refinitiv consensus of $5.74, however, we calculate EPS would have declined 29.1% absent buybacks. AutoNation has long been an aggressive repurchaser of its stock, having reduced the diluted share count by 90% since year-end 1998 by our calculation. First-quarter buybacks totaled 2.4 million shares for $305 million, or $127.08 per share, which we like since it’s below our fair value estimate. Buyback authorization is about $875 million, and we don’t expect the board to hesitate to increase this amount when likely needed later this year. Management remains well disciplined by balancing repurchases while maintaining a healthy balance sheet and investing in omnichannel capability and the AutoNation USA standalone used stores. The USA stores opened two more locations in the quarter (Albuquerque and Austin) to bring its store count to 15.

We believe AutoNation's massive size and economy of scale advantages will allow the company to deliver operating margins often above 4%, and we see upside potential to profits as its AutoNation USA stand-alone used-vehicle stores roll out. There are 13 USA stores at year-end 2022, and in April 2021 the firm announced plans to have over 130 by the end of 2026 (more recent language just says over 130 long term), with some in new U.S. markets.

Narrow-moat AutoNation used share repurchases to boost its fourth-quarter adjusted EPS by 10.6% year over year to $6.37, which beat the $5.83 Refinitiv consensus. Same-store revenue rose 1.2% on high-single-digit growth from new vehicles and service. We are not changing our fair value estimate of $149 but will revisit all modeling assumptions after the 10-K is filed. We calculate that, excluding buybacks, EPS would have fallen 16% to $4.84. The buybacks more than offset a 25% decline in pretax income brought on by lower gross profit dollars in all segments except service, which grew 12.3%. These trends make sense given the sector is seeing declines in new-vehicle profitability (AutoNation's new-vehicle gross profit per unit fell by 12.7% to $5,633) as inventory slowly improves from the chip shortage and that shortage drastically hurting used-vehicle affordability for both retailers and consumers. Used-vehicle GPU fell by 10.5% and used unit volume declined 9.2% versus a 4.3% rise in new-vehicle volume. Pricing rose for both new (up 3.4%) and used (up 2%) to $52,394 and $29,780, respectively.

2022 U.S. light vehicle sales per Wards were 13.7 million, an 8.1% decline from 2021 and their worst year since 2011’s 12.8 million. December sales, however, grew 4.9% year over year with the seasonally adjusted annualized selling rate at 13.31 million, up from December 2021’s 12.72 million. The chip shortage rather than poor demand is to blame and we expect one more year of constrained production for the industry. Regardless of high interest rates and average transaction prices over $45,000, we feel U.S. autos have been at recessionary levels for a lot of the time since spring 2020, so we expect 2023 sales to rise by midsingle digits. Gradual improvement in new vehicle inventory should help used vehicle pricing eventually be more affordable for consumers, which is also good for dealers’ used vehicle margins that are currently squeezed by high procurement costs.

AutoNation’s third quarter saw adjusted diluted EPS rise year over year by 17.2% to $6.00 but still miss the Refinitiv consensus of $6.27. We are increasing our fair value estimate to $149 from $137 on the time value of money and from lowering our share count by about 10% to reflect large share repurchase activity this year that we expect to continue in 2023. Through the first nine months of 2022 the company repurchased 10.9 million shares for $1.2 billion and in the fourth quarter so far has repurchased another 2.7 million shares for about $287 million, which equates to 22% of the shares outstanding at the start of the year. The company announced a new $1 billion buyback authorization, which brings the total authorization to $1.4 billion.

We believe AutoNation's massive size and economy of scale advantages will allow the company to deliver operating margins often above 4%, and we see upside potential to profits as its AutoNation USA stand-alone used-vehicle stores roll out. There are 12 USA stores, and in April 2021 the firm announced plans to have over 130 by the end of 2026 (more recent language just says over 130 long term), with some in new U.S. markets. In 2013, the company rebranded all of its 15 regional brands to the AutoNation name.

We are not changing our AutoNation fair value estimate after it reported its best-ever quarterly EPS. Diluted EPS of $6.48 rose by 34% year over year to beat the Refinitiv consensus of $6.22. Although results remain strong, we think continued fears of a possible recession and of peak earnings for the cycle happening now will remain an overhang on dealer stocks for the next few quarters. Same-store revenue fell by 5.4% mostly due to a 17.4% decline in new vehicle revenue. The chip shortage continues to hurt new vehicle inventory for all automakers and same store new unit volume fell by 27.5%. This supply dearth helps pricing power though and same store new vehicle revenue per unit rose by 13.9% to $50,627 and gross profit per new unit grew 47% to $6,109 which enabled aggregate same store new gross profit dollars to rise by 6.6%. Same store used vehicle gross profit declined by 22.1% despite an 18.4% rise in price per unit. This trend exists throughout our coverage due to the chip shortage significantly raising used inventory acquisition costs, which will likely continue into next year, in our view.

We feel AutoNation had an excellent quarter to start 2022, and we are raising our fair value estimate to $137 from $132. The change is from the time value of money and a lower share count to factor in more share repurchases because AutoNation through April 19 spent $518 million on buybacks. We were modeling $500 million for the whole year and now model $1 billion, which may need to be increased if the company focuses more on share repurchases than acquisitions this year. The buyback program has $376 million available as of April 19, and we believe the board will authorize more if needed, which we would not mind as the stock trades well below our fair value estimate.

We believe AutoNation's massive size and economy of scale advantages will allow the company to deliver operating margins often above 4%, and we see upside potential to profits as its AutoNation USA stand-alone used-vehicle stores roll out. There are 11 USA stores, and in April 2021 the firm announced plans to have over 130 by the end of 2026, with some in new U.S. markets. In 2013, the company rebranded all of its 15 regional brands to the AutoNation name. A single brand is effective for internet searches, and it lets AutoNation reduce fees to third-party search firms.

We believe AutoNation's massive size and economy of scale advantages will allow the company to deliver operating margins often above 4%, and we see upside potential to profits as its AutoNation USA stand-alone used-vehicle stores roll out. There are 10 USA stores, and in April 2021 the firm announced plans to have over 130 by the end of 2026, with some in new U.S. markets. In 2013, the company rebranded all of its 15 regional brands to the AutoNation name. A single brand is effective for internet searches, and it lets AutoNation reduce fees to third-party search firms.

AutoNation finished 2021 on an all-time record quarter with adjusted diluted EPS of $5.76 up 137% year over year and well above the Refinitiv consensus of $4.96. We see nothing in the results to merit the stock falling by about 5% after the earnings release. We agree with new CEO Mike Manley’s remarks on the call that the stock is undervalued. We leave our fair value estimate in place but will reassess all valuation inputs when we roll our model forward for the 10-K.