We are not changing our AutoNation (AN) fair value estimate after the auto dealer announced a restructuring plan and executive departures, as we do not see our investment thesis as compromised. The company seeks $50 million in cost reductions in part due to its belief that "automotive retail will be challenging in 2019." We expect U.S. auto sales will decline in 2019 though still be at healthy levels, but pricing risks and expensive store imaging rules from automakers remain. AutoNation is consolidating its operating structure to two regions--east and west--from three. The former central region president now runs the eastern region and the former eastern region president, Jim Bender, is now executive vice president of sales. COO Lance Iserman, CTO Tom Conophy, and real estate executive Donna Parlapiano have left the company, and human resources head Dennis Berger will leave Jan. 31.
It appears to us CEO Mike Jackson is cleaning house at the executive level. Given that Conophy had only been with AutoNation for a couple of years, perhaps Jackson is not pleased with current results or wants the next CEO to pick his or her own team. In September, when the company announced Jackson will step down as CEO but remain chairman, it also mentioned using an executive search firm, so Iserman may have felt he had no chance of becoming CEO and sought a change.
We think AutoNation's stock is undervalued, but it may remain cheap until more certainty comes in governance. We think it may be hard to find a good CEO who is willing to work under Jackson as well. Michael Larson of Cascade Investments had been lead independent director but resigned from the board in December after nearly nine years, saying it was a good time to transition. Given that Larson was probably leading the CEO search, we disagree with that statement unless he was not willing to conduct the search. Longtime director Rick Burdick, a law partner at Akin, Gump, Strauss, Hauer & Feld, is now lead independent director.
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David Whiston, CFA, CPA, CFE does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.