AutoNation, Inc. (AN) is the largest automotive dealer in the United States, with over 230 dealerships and over 300 locations, including collision centers. AN has eight AutoNation USA used-vehicle stores, four auction sites, and over 50 collision centers across 16 states, but primarily in the Sunbelt metropolitan areas.
The company just posted its sixth consecutive record numbers for the third quarter. Earnings surged 115% year over year due to higher-than-expected profits from the new and used vehicle units. Low inventory due to the chip shortage is yielding strong pricing power for dealers.
Management believes demand will continue to exceed supply well into next year. An upside to recent inflation is that customers with trade-in vehicles are pretty happy as they are worth more than expected. This means inflation isn’t likely to slow consumers’ automotive purchasing power in 2022.
In the quarter, the company also announced its second acquisition of 2021. The impending buyout of Priority 1 Automotive Group, a Maryland-based company with premium brand franchises including Acura, BMW, and Audi, is expected to close by year-end and should bring about $420 million in additional annual revenue.
AN previously purchased 11 stores and a collision center from Peacock Automotive Group. This has added $380 million to its annual revenues. The company is also benefiting from enhanced digital solutions that have helped it boost profitability and its market presence.
For instance, the firm has implemented options such as ship-to-home next day, curb-side pick, and buy online, pick-up in stores. These initiatives are driving more traffic to AN’s online site. In fact, its omnichannel system is a crucial part of the company’s long-term growth strategy.
The launch of its digital platform, AutoNation Express, is a big part of that. It enables customers to personalize their vehicle purchases and sales online. AN’s extensive dealer network, strong footprint, and store expansion efforts should also help growth long-term. It is also expanding its auto repair and used-vehicle operations, which carry higher margins.
AN has an overall grade of B, translating into a Buy rating in our POWR Ratings system. The company has a Growth Grade of B as earnings per share have grown an average of 42.9% per year over the past three years. Analysts expect earnings to soar 102.1% year over year in the current quarter and 144.7% for the year.
AN also has a Value Grade of A, which makes sense with a trailing P/E of 8.22 and a forward P/E of 6.10. We also provide Momentum, Stability, Sentiment, and Quality Grades for AN, which you can find here. AN is ranked #6 in the B-rated Auto Dealers & Rentals industry. For more top stocks in this industry, make sure to visit this link.
Speaking of the Auto Dealers & Rentals industry, AN is performing much better than some of its peers. For instance, CarMax, Inc. (KMX) has an overall grade of D, which translates into a Sell rating in our POWR Ratings system. The company has a Growth Grade of D, which doesn’t install confidence. This was likely driven by expected earnings gain of only 1.7% for the whole year, next year. KMX also has a Value Grade of C as its price to book ratio of 4.8 is well above the industry average.
Carlotz, Inc. (LOTZ) is another competitor, and like KMX, it has an overall grade of D and a Sell rating in our POWR Ratings system. The company has a Growth Grade of C and a Value Grade of C, which doesn’t make me want to go out and buy the stock. Earnings are expected to drop 102.5% next year, which does bode well for its future. Its price to sales ratio of 3.7 is also well above the industry average.
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AN shares fell $1.59 (-1.25%) in after-hours trading Tuesday. Year-to-date, AN has gained 82.86%, versus a 26.45% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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