Investment research report for AN

Table of Contents

Executive Summary
Valuation Analysis
Industry and Competitors Analysis
Financial Analysis
Earnings Call Multi-Year Analysis
Financial Statements Multi Year
Insider Trading Analysis
Management Compensation Benchmark Analysis
Proxy Statement Analysis
News Analysis
Technical Indicators Analysis
Financial Statements Annual
Financial Statements Quarterly
Earnings Call Analysis

Executive Summary

Company Description

AutoNation, Inc. (AN) is a leading automotive retailer in the United States, operating through its subsidiaries and dealerships. The company offers new and used vehicles, as well as related services such as financing, insurance, maintenance, and repairs. With a nationwide presence and a focus on customer experience, AutoNation aims to provide a seamless and convenient automotive retail experience.

Key Insights

  1. Resilient Business Model: AutoNation has made structural improvements to its business model, focusing on areas like used vehicle sales, customer financial services, aftermarket services, and cost control. This has made the company more resilient to cyclical factors affecting new vehicle sales.

  2. Growth Opportunities: The expansion of AutoNation’s used vehicle retail stores (AutoNation USA) and investments in digital capabilities are key growth opportunities. The company is also exploring opportunities to diversify its revenue streams beyond the traditional franchise dealership model.

  3. Capital Allocation Discipline: AutoNation maintains a disciplined approach to capital allocation, balancing investments in growth initiatives, strategic acquisitions, and significant share repurchases when the stock is viewed as undervalued.

  4. Operational Efficiency: AutoNation has achieved significant improvements in profitability through cost control and operational efficiency. Management believes these improvements are structural and can be sustained going forward.

Overall, the key insights suggest that AutoNation has transformed its business model to be more resilient, diversified, and focused on long-term growth opportunities, while maintaining financial discipline. This positions the company well for creating sustainable shareholder value over the long term.

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Valuation Analysis

PE Ratio

The PE ratio for company AN is as follows:
– Low: 4.486581467136342
– Base: 9.317872972570443
– High: 14.149164478004543

PB Ratio

The PB ratio for company AN is as follows:
– Low: 1.2134837215903052
– Base: 2.3001598247437194
– High: 3.386835927897134

Unable to provide price targets since this company’s financials are highly unstable. We recommend not to hold this stock in your portfolio.

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Industry and Competitors Analysis

Industry Overview

The industry is Auto – Dealerships, which involves the retail sale of new and used vehicles, as well as related services such as financing, insurance, maintenance, and repairs.

Key Competitors

The key competitors mentioned are:

  1. AutoNation, Inc. (AN)
  2. Sonic Automotive, Inc. (SAH)
  3. Lithia Motors, Inc. (LAD)
  4. Asbury Automotive Group, Inc. (ABG)
  5. Penske Automotive Group, Inc. (PAG)
  6. Group 1 Automotive, Inc. (GPI)

These companies operate automotive dealerships and franchises across various regions in the United States and, in some cases, internationally.

Competitive Positioning

In terms of competitive positioning, based on the financial metrics provided, some key observations are:

  1. AutoNation (AN) and Lithia Motors (LAD) appear to be the largest players in terms of revenue and market capitalization.
  2. Penske Automotive Group (PAG) also has a significant presence and strong financial performance.
  3. Asbury Automotive Group (ABG) and Group 1 Automotive (GPI) are relatively smaller players but still have substantial operations.
  4. Sonic Automotive (SAH) seems to be the smallest among the competitors mentioned, with lower revenue and market capitalization.

However, it’s important to note that these observations are based solely on the limited financial information provided, and a more comprehensive analysis would be required to fully assess the competitive dynamics and positioning of these companies within the auto dealership industry.

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Chart of Competitors

"Chart of Competitors"

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Financial Analysis

Financial Strength

AutoNation has maintained a relatively stable return on equity and return on assets over the past few years, indicating decent profitability from its operations. The company’s debt levels, as measured by the debt-to-equity ratio, have been elevated but manageable, ranging from around 1.3x to 3.4x over the period. Interest coverage ratios have generally been healthy, suggesting the company can comfortably service its debt obligations.

Growth Potential

Revenue growth has been uneven, with some quarters showing decent increases but others experiencing declines. Analyst estimates suggest modest revenue growth expectations of around 2-3% annually over the next few years. Net income growth has also been volatile, impacted by fluctuations in the auto sales market.

Competitive Advantage

As a leading automotive retailer with a nationwide presence, AutoNation likely benefits from economies of scale and brand recognition. However, the auto retail business is highly competitive, and the company faces intense rivalry from other major dealership groups and online auto retailers.

Management Quality

Metrics like return on capital employed and operating cash flow growth suggest management has been reasonably effective in allocating capital and generating cash flows. However, the inconsistent revenue and profit growth could indicate room for improvement in execution and adapting to market conditions.

Shareholder Friendliness

AutoNation does not currently pay dividends, which may be less appealing to income-oriented investors. Share repurchases have been limited, with the weighted average share count remaining relatively stable.

Valuation

The company’s current price-to-earnings ratio of around 9-10x is relatively low compared to historical levels, potentially indicating an attractive valuation. However, the volatile earnings growth makes P/E ratios less reliable, and other valuation metrics like EV/EBITDA may be more appropriate for a cyclical business like auto retail.

Overall, AutoNation appears to be a financially stable company with a competitive position in the auto retail market. However, its growth prospects seem modest, and management will need to navigate industry headwinds effectively. The current valuation could be attractive for investors willing to weather potential cyclicality in the business.

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Chart of Key Per Share Metrics

"Chart of Key Per Share Metrics"

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Chart of Absolute Metrics

"Chart of Absolute Metrics"

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Earnings Call Multi-Year Analysis

Business Model Resilience

AutoNation has made structural improvements to its business model, focusing on areas like used vehicle sales, customer financial services, aftermarket services, and cost control. This has made the company more resilient to cyclical factors affecting new vehicle sales.

Used Vehicle Growth

The expansion of AutoNation’s used vehicle retail stores (AutoNation USA) is a key growth opportunity. The company has strong self-sourcing capabilities and is leveraging data analytics to optimize used vehicle inventory and pricing.

Diversifying Revenue Streams

AutoNation is actively exploring opportunities to diversify its revenue streams beyond the traditional franchise dealership model. Initiatives like mobile services, parts e-commerce, and potentially captive financing are being evaluated.

Digital Capabilities

The company has invested significantly in its digital platform, enabling a seamless omnichannel experience for customers and improving sales productivity. This digital foundation is a competitive advantage.

Capital Allocation Discipline

AutoNation maintains a disciplined approach to capital allocation, balancing investments in growth initiatives, strategic acquisitions, and significant share repurchases when the stock is viewed as undervalued.

Inventory Management

The industry is rethinking the traditional “push” model of high inventory levels, with AutoNation seeing potential for a new model with leaner inventory levels (30-40 days) that could support higher profitability.

Profitability Improvements

AutoNation has achieved significant improvements in profitability through cost control and operational efficiency. Management believes these improvements are structural and can be sustained.

Overall, the key insights suggest that AutoNation has transformed its business model to be more resilient, diversified, and focused on long-term growth opportunities, while maintaining financial discipline. This positions the company well for creating sustainable shareholder value over the long term.

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Financial Statements Multi Year

Revenue and Profitability

Revenue growth has been modest in recent years, with some quarters seeing year-over-year declines driven by lower used vehicle sales. Profitability has been under pressure, with gross profit, operating income, and net income declining in several quarters due to lower vehicle gross margins, higher expenses, and increased interest costs.

Inventory and Supply Chain

New vehicle inventory levels have improved from pandemic lows but remain below historical norms. Used vehicle inventory has been managed to align with market demand. Supply chain disruptions have impacted vehicle availability and profitability.

Capital Allocation

AutoNation has maintained a strong liquidity position with ample cash and credit availability. The company has been actively repurchasing shares, demonstrating a commitment to returning capital to shareholders. Capital expenditures have focused on facility upgrades and expanding the AutoNation USA used vehicle store network.

Strategic Initiatives

Investments have been made in digital capabilities, customer experience, and strategic acquisitions like RepairSmith to drive future growth. Expansion of the AutoNation USA used vehicle store footprint is a key growth initiative.

Overall, while AutoNation has faced headwinds impacting profitability, the company maintains a solid financial position and is investing in strategic initiatives to drive long-term growth and shareholder value creation. Careful management of costs, inventory, and capital allocation will be important going forward.

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Insider Trading Analysis

Long-Term Patterns

The CEO, Edward Lampert, has been consistently selling large blocks of shares over the past 2 years, reducing his ownership from over 9.6 million shares to under 2 million. This suggests he may be less bullish on the long-term prospects of the company.

Several other top executives like the CFO, COO, and other senior leaders have also been regularly selling shares, further indicating potential concerns about the company’s future.

Insider selling has been widespread across the leadership team, not just isolated to a few individuals.

Short-Term Implications

The high volume of insider selling, especially by the CEO and other top executives, could signal that they believe the stock is overvalued in the near-term and may be due for a pullback.

Investors should closely monitor any further insider selling activity, as it may foreshadow potential challenges or a change in the company’s outlook.

The recent spike in insider selling may create some short-term downward pressure on the stock price, presenting potential buying opportunities for more risk-tolerant investors.

Overall, the consistent and widespread insider selling activity across AutoNation’s leadership team suggests long-term caution, which long-term investors should carefully consider. Short-term investors may want to watch for potential buying opportunities if the insider selling continues to put pressure on the stock price.

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Management Compensation Benchmark Analysis

Alignment with Shareholder Value

The compensation structure for AN’s executives does not appear to be strongly aligned with creating long-term shareholder value. The base salary portion of total compensation is relatively low, ranging from around 8-26% across the reported executives. This suggests a greater emphasis on variable, performance-based compensation rather than fixed salary.

Reliance on Stock Awards and Incentive Plans

A significant portion of the executives’ total compensation comes from stock awards and incentive plan compensation, which can incentivize short-term performance over sustainable long-term growth.

Lack of Bonus Payments

None of the reported executives received bonuses, which are often used to reward achievement of specific short-term goals. The absence of bonuses may indicate a compensation structure focused more on long-term incentives.

Compensation Levels

The total compensation for AN’s executives, particularly the CEO and CFO, appears to be in line with or slightly higher than the compensation levels observed for similar roles at the benchmark companies (SAH, LAD, ABG, and PAG). This suggests that AN’s executive pay is competitive within the industry.

In comparison, the benchmark companies generally have a higher base salary portion of total compensation, ranging from around 35-46% on average. This may indicate a more balanced approach to executive pay, with a greater emphasis on fixed compensation to align with long-term shareholder interests.

Overall, the executive compensation structure at AN does not appear to be strongly focused on creating long-term shareholder value, as evidenced by the relatively low base salary portion and heavy reliance on variable, performance-based compensation. A long-term investor may want to closely monitor the company’s performance and any changes to the compensation structure to ensure alignment with their investment objectives.

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Proxy Statement Analysis

Annual Incentive Compensation

The metrics used, such as Adjusted EBITDA, Adjusted EPS, and Retail New Vehicle Unit Sales, focus on profitability, earnings growth, and operational performance, which are important drivers of long-term value creation.

Long-Term Incentive Compensation

The use of Relative Total Shareholder Return (TSR) as a metric directly ties executive compensation to shareholder returns relative to peers. Additionally, the inclusion of Adjusted EBITDA incentivizes profitability and growth.

Stock Ownership Guidelines

The company has stock ownership guidelines for executives, which helps align their interests with those of long-term shareholders.

Clawback Policy

The existence of a clawback policy discourages short-term risk-taking and promotes long-term decision-making by allowing the company to recoup incentive compensation in cases of financial restatements or misconduct.

Overall, the executive compensation program appears to be designed to incentivize and reward executives for achieving key financial and operational metrics that are critical for long-term value creation and shareholder alignment.

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News Analysis

Positive Factors

AutoNation has been reporting strong earnings beats and record profits in recent quarters, driven by high demand for both new and used vehicles amid tight supplies. The company has been aggressively buying back shares, announcing new $1 billion buyback programs. AutoNation is expanding its digital and online sales capabilities to adapt to changing consumer preferences. The global chip shortage has boosted vehicle prices and profits for auto retailers like AutoNation. Analysts are optimistic about AutoNation’s prospects, with some seeing over 25-30% upside potential in the stock.

Potential Risks/Concerns

Profitability could normalize as supply chain issues ease and vehicle inventories improve. Rising interest rates could dampen consumer demand for vehicle purchases. Competition from online auto retailers like Carvana and shift towards electric vehicles could pressure AutoNation’s traditional dealership model long-term. The stock has already had a huge run-up, making valuation a potential concern.

Overall, the general sentiment seems positive, with AutoNation benefiting from favorable industry conditions. However, some risks around normalization of demand/pricing and competitive threats exist that long-term investors should monitor. The key will be how well AutoNation adapts its business model for the future.

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Technical Indicators Analysis

Next Week Trading

The stock has seen some volatility in the past few trading sessions, with the price fluctuating between $161-$170. The 10-day RSI is currently around 55, indicating the stock is in neutral territory and not overbought or oversold. The 20-day TEMA is currently at $167.58, providing a short-term upward trend. Given the recent volatility, a short-term trader may look for opportunities to trade in and out of the stock over the next week, aiming to capitalize on any price swings.

Resistance and Support Levels

The 50-day SMA is currently at $163.58, which could act as a support level. The 200-day SMA is at $149.37, providing a longer-term support level. The recent high of around $172 could act as a resistance level in the near term.

Short Term Investor

The 14-day ADX is around 21, indicating a moderately strong trend. The 10-day RSI is in the mid-50s, suggesting the stock is not overbought or oversold. The 20-day TEMA is above the current price, indicating a short-term upward trend. A short-term investor may look to hold the stock, potentially targeting the recent high of $172 as a near-term price target.

Long Term Investor

The 200-day SMA of $149.37 provides a longer-term support level. The stock has been trading in an upward trend, with the 50-day SMA above the 200-day SMA. The 14-day ADX of 21 suggests a moderately strong trend, which could be favorable for long-term investors. A long-term investor may view the current price levels as an opportunity to establish or add to a position, with a focus on the stock’s long-term growth potential.

Overall, the technical indicators suggest a mix of short-term volatility and longer-term upward momentum, which could appeal to both short-term and long-term investors, depending on their risk tolerance and investment horizons.

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Chart of Valuation History

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Financial Statements Annual

Financial Statements Annual 2024 Q2

Income statement

Revenue grew 6% year-over-year, driven by increases in new vehicle sales, parts and service, and finance and insurance revenue. Gross profit decreased 3% due to declines in new vehicle and used vehicle gross profit, partially offset by an increase in parts and service gross profit. Operating income decreased 18% due to higher selling, general and administrative expenses, including increased investments in technology and strategic initiatives. Net income decreased 26% due to the operating income decline and higher interest expense.

Balance sheet

Cash and cash equivalents decreased $118 million, primarily due to $874 million in share repurchases, partially offset by cash generated from operations. Inventory increased $9.9 billion, reflecting higher new and used vehicle inventory levels. Total debt increased $1.2 billion, primarily due to an increase in commercial paper outstanding. Shareholders’ equity decreased $364 million, primarily due to the share repurchases.

Cash flow

Cash provided by operating activities decreased $9.4 billion, primarily due to an increase in working capital requirements and higher originations of auto loans receivable. Cash used in investing activities increased $906 million, primarily due to higher capital expenditures and acquisitions. Cash used in financing activities decreased $9.8 billion, primarily due to lower share repurchases. Free cash flow (operating cash flow less capital expenditures) decreased $10.2 billion.

The key insights are the declines in profitability, the increase in debt and working capital, and the significant decrease in free cash flow – all of which could be concerning for long-term investors. The company will need to carefully manage its costs, inventory, and capital allocation to improve its financial performance going forward.

Financial Statements Annual 2023 Q2

Strong Financial Performance

AutoNation reported net income of $13.8 billion and diluted earnings per share of $24.29 in 2022, compared to $13.7 billion and $18.31 in 2021. Total revenue increased by 4.4% to $269.9 billion in 2022, driven by increases in new vehicle, parts and service, and finance and insurance revenue. Gross profit increased by 6.3% to $52.7 billion, with improvements across all major business segments.

Segment Performance

The Premium Luxury segment was the strongest performer, contributing 38% of total segment income in 2022, driven by increases in new vehicle, parts and service, and finance and insurance gross profit. The Domestic and Import segments also saw improvements in segment income, up 5.1% and 2.7% respectively, despite some headwinds.

Strategic Initiatives

AutoNation continued to invest in strategic initiatives, including the expansion of its AutoNation USA used vehicle stores and the acquisition of CIG Financial, an auto finance company. The company also acquired a minority stake in TrueCar and completed the acquisition of RepairSmith, a mobile automotive repair and maintenance solution.

Inventory Management

New vehicle inventory levels remained significantly lower than historical standards due to supply chain disruptions, leading to higher profitability per vehicle. Used vehicle inventory was managed effectively, with writedowns of $74 million at the end of 2022.

Capital Allocation

AutoNation repurchased $17.1 billion of its common stock in 2022, demonstrating its commitment to returning capital to shareholders. The company maintained a strong balance sheet, with $36.3 billion in non-vehicle long-term debt and $21.1 billion in vehicle floorplan payables at the end of 2022.

Overall, AutoNation delivered strong financial results in 2022, driven by its diversified business model, effective inventory management, and strategic investments to enhance its competitive position in the automotive retail industry.

Financial Statements Annual 2022 Q2

Strong Financial Performance in 2021

Net income from continuing operations increased significantly to $13.7 billion in 2021 compared to $3.8 billion in 2020, driven by higher revenue and gross profit. Diluted earnings per share from continuing operations increased to $18.31 in 2021 from $4.30 in 2020. Total revenue increased 26.7% to $258.4 billion in 2021 compared to $203.9 billion in 2020, with increases across all major revenue streams. Gross profit increased 39% to $49.5 billion in 2021 compared to $35.7 billion in 2020, with improvements in new vehicle, used vehicle, parts and service, and finance and insurance gross profit.

Segment Performance

The Premium Luxury segment was the strongest performer, with revenue increasing 28.1% and segment income increasing 75.1% in 2021 compared to 2020. The Domestic and Import segments also saw significant improvements in revenue and segment income in 2021 compared to 2020.

Strategic Initiatives

AutoNation plans to expand its AutoNation USA used vehicle store footprint, targeting over 130 stores by the end of 2026. The company continues to invest in its digital capabilities and customer experience initiatives to drive growth and improve efficiency.

Inventory Management

New vehicle inventory levels were significantly lower at the end of 2021 compared to 2020 due to supply chain disruptions, leading to higher profitability per vehicle. The company closely manages its used vehicle inventory to minimize carrying costs and maximize profitability.

Capital Allocation

AutoNation continues to deploy capital towards facility upgrades, new store openings, and strategic acquisitions, while also repurchasing its common stock. The company maintains a strong balance sheet with ample liquidity to support its growth initiatives and capital allocation priorities.

Overall, AutoNation demonstrated strong operational and financial performance in 2021, leveraging its scale, brand, and strategic initiatives to navigate the challenging industry environment and deliver significant value to shareholders.

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Financial Statements Quarterly

Financial Statements Quarterly 2024 Q2

Total revenue increased 1.4% year-over-year, driven by growth in new vehicle, parts and service, and finance and insurance revenue. Gross profit declined 6.9% year-over-year, primarily due to decreases in new and used vehicle gross profit margins. Operating income declined 23.2% year-over-year, reflecting the lower gross profit and higher selling, general, and administrative expenses. Net income declined 34.1% year-over-year, driven by the lower operating income and higher interest expense.

Segment Performance

The Domestic segment saw a 36.5% decline in segment income, the Import segment saw a 19.7% decline, and the Premium Luxury segment saw a 24.3% decline, all due to lower vehicle gross profit margins. The Corporate and Other segment saw a 5.4% improvement in operating results, driven by growth in the auto finance business and collision centers.

Liquidity and Capital Allocation

The company has ample liquidity, with $603 million in cash and $19 billion in available revolving credit facility capacity. The company repurchased $387 million of its common stock during the quarter and has $2.8 billion remaining under its current share repurchase authorization. Capital expenditures of $937 million were focused on maintaining and upgrading existing facilities, as well as expanding the AutoNation USA used vehicle store network.

New vehicle inventory days supply increased to 44 days, up from 25 days a year ago, reflecting improved supply. Used vehicle inventory days supply increased to 31 days, up from 29 days a year ago, as the company took actions to better align used vehicle inventory with market demand. Floorplan interest expense increased significantly due to higher average floorplan balances and interest rates, negatively impacting profitability.

Overall, the financial statements indicate that the company is facing headwinds from moderating vehicle gross profit margins, though it continues to maintain a strong liquidity position and focus on capital allocation to drive long-term shareholder value.

Financial Statements Quarterly 2024 Q1

Revenue and Profitability

Total revenue decreased slightly by 0.5% year-over-year for the nine months ended September 30, 2023, driven by declines in used vehicle sales. Gross profit decreased 1.7% year-over-year, with declines in new and used vehicle gross profit partially offset by growth in parts and service gross profit. Operating income declined 18.6% year-over-year, impacted by higher selling, general and administrative expenses and increased interest expense. Net income from continuing operations decreased 26.3% year-over-year, reflecting the decline in operating performance.

Inventory and Liquidity

New vehicle inventory days supply increased to 31 days as of September 30, 2023, up from 15 days a year earlier, indicating improving supply. The company had $640 million in cash and cash equivalents and $18.99 billion in available borrowing capacity under its revolving credit facility as of September 30, 2023, providing ample liquidity. The company’s leverage ratio of 2.02x and interest coverage ratio of 7.15x as of September 30, 2023 were well within the covenants under its credit agreement.

Capital Allocation

The company repurchased $7.12 billion of its common stock during the first nine months of 2023, demonstrating a commitment to returning capital to shareholders. Capital expenditures increased 21.1% year-over-year to $2.86 billion, as the company continued to invest in its business, including the expansion of its AutoNation USA used vehicle stores.

Segment Performance

The Domestic and Import segments experienced declines in profitability due to lower new and used vehicle gross profits, while the Premium Luxury segment also saw a decrease in profitability. The Corporate and other segment, which includes the company’s AutoNation USA stores, collision centers, and auto finance operations, reported higher losses due to increased investments and expenses.

Overall, the financial statements indicate that AutoNation is facing headwinds in its core new and used vehicle operations, leading to a decline in profitability. However, the company maintains a strong liquidity position and continues to invest in strategic initiatives, such as the expansion of its AutoNation USA used vehicle stores. The significant share repurchase activity suggests a focus on returning capital to shareholders.

Financial Statements Quarterly 2023 Q4

Revenue and Profitability

Total revenue decreased 2.4% year-over-year in Q2 2023, driven by declines in used vehicle sales. Gross profit decreased 1.9% year-over-year in Q2 2023, with declines in new and used vehicle gross profit partially offset by an increase in parts and service gross profit. Operating income decreased 21.3% year-over-year in Q2 2023, primarily due to higher selling, general and administrative expenses. Net income decreased 27.6% year-over-year in Q2 2023, impacted by lower operating income and higher interest expense.

Segment Performance

The Domestic segment saw revenue and segment income decline in Q2 2023, driven by lower used vehicle sales and gross profit. The Import segment also experienced a decline in segment income in Q2 2023, due to lower new and used vehicle gross profit. The Premium Luxury segment had a slight increase in revenue but a 14.0% decrease in segment income, impacted by lower new vehicle gross profit.

Inventory and Liquidity

New vehicle inventory days supply improved to 26 days at the end of Q2 2023, compared to 11 days a year earlier, indicating better supply. The company had $638 million in cash and cash equivalents and $18.0 billion in available borrowing capacity under its revolving credit facility as of June 30, 2023. AutoNation repurchased $5.2 billion of its common stock during the first six months of 2023.

Debt and Capital Allocation

On July 18, 2023, the company amended and restated its credit agreement, increasing the revolving credit facility to $19 billion and extending the maturity to 2028. Capital expenditures were $2.1 billion in the first six months of 2023, primarily for facility upgrades and the expansion of AutoNation USA used vehicle stores. The company continues to focus on growing its business through strategic acquisitions and investments, while also returning capital to shareholders through share repurchases.

Overall, the financial statements indicate that AutoNation faced some headwinds in Q2 2023, with declines in revenue, profitability, and segment performance, particularly in the used vehicle business. However, the company maintains a strong liquidity position and is actively investing in its strategic initiatives and returning capital to shareholders.

Financial Statements Quarterly 2023 Q3

Revenue and Profitability

Total revenue decreased 5.2% year-over-year, driven by declines in used vehicle sales. Gross profit decreased 1.7%, with declines in new vehicle and finance & insurance gross profit partially offset by increases in used vehicle and parts & service gross profit. Operating income decreased 14.6%, primarily due to higher selling, general, and administrative (SG&A) expenses related to acquisitions, new store openings, and investments in technology and strategic initiatives.

Inventory and Supply Chain

New vehicle inventory days supply improved to 25 days from 8 days a year ago, indicating better supply, though still below historical norms. Used vehicle inventory days supply remained relatively stable at 29 days compared to 30 days a year ago.

Capital Allocation and Liquidity

The company repurchased $3.05 billion of its common stock during the quarter, demonstrating a continued focus on returning capital to shareholders. AutoNation maintained a strong liquidity position, with $584 million in cash and cash equivalents and $18 billion in available borrowing capacity under its revolving credit facility as of March 31, 2023.

Segment Performance

The Domestic and Import segments experienced declines in profitability due to lower new vehicle gross profit and higher floorplan interest expense. The Premium Luxury segment saw a slight decrease in profitability, as higher used vehicle and parts & service gross profit was offset by lower new vehicle gross profit and higher floorplan interest expense.

Strategic Initiatives

The company continued to invest in the expansion of its AutoNation USA used vehicle stores, opening two additional locations during the quarter. AutoNation acquired RepairSmith, a mobile automotive repair and maintenance business, to expand its aftermarket service capabilities.

Overall, the financial statements indicate that AutoNation is navigating the challenging supply chain environment and investing in strategic initiatives to drive long-term growth, while maintaining a strong balance sheet and returning capital to shareholders.

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Earnings Call Analysis

Earnings Call Analysis 2024 Q2

New Vehicle Supply Chain Recovery

The new vehicle supply chain is recovering, with inventory levels nearing normalized levels, though there is still a wide range by model and segment. This suggests improving new vehicle sales trends.

Used Vehicle Margin Constraints

Used vehicle margins remain constrained, with tight availability of late-model used vehicles. The company is focused on effective sourcing, pricing, and inventory turn to optimize used vehicle profitability.

AutoNation Finance Performance

The AutoNation Finance business is performing well, with a growing portfolio and improving credit profile. It is providing a deeper customer relationship and attractive returns.

Parts and Service Business Strength

The parts and service business continues to be a strong performer, driven by higher value repair orders and increased repair order volume. The company is investing in technician development to support continued growth.

Financial Discipline and Capital Allocation

The company is maintaining financial discipline, with a focus on cash flow and capital allocation. It is balancing share repurchases, M&A, and leverage levels to maximize shareholder returns.

Management’s Handling of Industry Dynamics

The management team seems to have a good handle on the industry dynamics and is taking appropriate actions to navigate the current environment, while investing for long-term growth.

Overall, the company appears to be well-positioned with a resilient business model, though the used vehicle market and new vehicle margins remain areas of focus. The long-term investor should closely monitor the company’s ability to maintain profitability across its various business segments and its capital allocation strategy.

Earnings Call Analysis 2024 Q1

New Vehicle Inventory and Margins

New vehicle inventory levels are increasing and expected to continue growing in 2024, leading to a continued moderation of new vehicle margins, though at a slower pace than in 2023.

Used Vehicle Market

The used vehicle market remains constrained, with tight availability and normalization of pricing and demand. AutoNation is focused on effective sourcing, pricing, and inventory turnover in this segment.

Customer Financial Services (CFS)

AutoNation’s customer financial services (CFS) business continues to perform well, with improvements in credit quality and loan origination growth. The integration of AutoNation Finance across the franchise stores is a key focus.

After-Sales Business

The after-sales business is a bright spot, with strong growth in revenue and margins. AutoNation sees opportunities to further penetrate the vehicle parc in its markets and expand services beyond the franchise stores.

Strategic Investments

AutoNation is making strategic investments in areas like mobile services and parts commerce, which may impact the SG&A to gross profit ratio in the short-term but are expected to drive long-term growth.

Capital Allocation

The company remains disciplined in its capital allocation, balancing reinvestment in the business, M&A, and share repurchases to maximize shareholder value.

Overall, the call suggests AutoNation is navigating the current market environment well, with a focus on optimizing its core business segments and selectively investing for future growth. The long-term investor should watch for the company’s ability to maintain profitability as the industry normalizes and its success in expanding higher-margin revenue streams.

Earnings Call Analysis 2023 Q4

Operational Execution

AutoNation has been able to maintain strong performance despite mixed economic signals, demonstrating operational excellence. The company has focused on growing its after-sales business, which delivered record revenue and margin in the quarter. AutoNation has been proactive in sourcing used vehicle inventory to support its growth initiatives, including the expansion of AutoNation USA stores.

Balanced Approach to Profitability

AutoNation’s sales teams are taking a holistic view of each sales transaction, considering not just the vehicle margin but also the income from customer financial services (CFS) and the value of the trade-in vehicle. This balanced approach has allowed the company to maintain strong combined margins on new and used vehicles, even as new vehicle gross profit per unit has moderated.

Diversification and Innovation

AutoNation is expanding its product and service offerings beyond the traditional dealership model, launching initiatives like AutoNation Mobility (mobile repair service) and an e-commerce parts and accessories platform. These new businesses complement the core dealership operations and demonstrate the company’s efforts to adapt to evolving customer needs and industry trends.

Capital Allocation

AutoNation has been actively repurchasing shares, taking advantage of the low interest rate environment and dislocation in the share price. The company remains disciplined in its capital allocation, balancing reinvestment in the business, potential M&A opportunities, and shareholder returns.

Analyst Insights

Analysts are focused on understanding AutoNation’s strategies for managing new and used vehicle inventory, as well as the company’s efforts to attract and retain technicians to support the growing after-sales business. Analysts are also interested in the company’s international expansion plans and how it evaluates potential M&A opportunities.

Overall, the key insights suggest that AutoNation is executing well operationally, diversifying its business model, and maintaining a balanced approach to profitability and capital allocation, which could be attractive for long-term investors.

Earnings Call Analysis 2023 Q3

Balanced business model

AutoNation has a balanced business model across new vehicles, used vehicles, parts/service, and finance & insurance. This diversification helps offset headwinds in any one segment.

Leveraging customer base

AutoNation has a large customer base of over 11 million households, but less than 50% are active customers currently. There is a significant opportunity to re-engage lapsed customers and increase wallet share through expanded product/service offerings.

Investing for long-term growth

AutoNation is making investments in technology, capabilities, and new business initiatives (e.g. AutoNation USA, RepairSmith) to drive long-term growth and structural changes to the business. These investments are running 100-200 bps of gross profit.

Disciplined capital allocation

AutoNation continues to return significant capital to shareholders through share repurchases, while also investing in the business and maintaining a strong balance sheet.

Industry dynamics

While new vehicle affordability is a concern, AutoNation believes OEMs have tools (incentives, leasing) to maintain demand. The company is well-positioned with inventory levels to navigate any potential industry disruptions like a UAW strike.

Recurring revenue focus

AutoNation is focused on growing higher-margin, recurring revenue streams like parts/service and finance & insurance, which now represent over 50% of gross profit.

Overall, the key is AutoNation’s balanced, diversified business model and disciplined approach to investing for long-term growth while maintaining financial flexibility. The company appears well-positioned to navigate industry challenges.

Earnings Call Analysis 2023 Q2

Resilience in a Mixed Environment

AutoNation has demonstrated resilience in the current mixed economic environment, reporting record Q1 EPS of $6.07. This was driven by disciplined capital allocation and the structural changes made to the business in recent years.

Inventory and Pricing Dynamics

New vehicle inventory remains below historical levels, but is recovering, with 45% of vehicles sold at MSRP. This suggests pricing power remains robust, though incentives may need to increase to maintain market share. Used vehicle supply is constrained due to lower new vehicle sales in recent years, leading AutoNation to focus on internal sourcing and pricing to maintain margins. This supply crunch may persist.

Aftermarket Performance

The after-sales business continues to be a strong performer, with double-digit growth in customer pay, warranty and collision work. However, technician availability remains a constraint on further growth.

Diversifying the Business Model

AutoNation is taking a measured approach to expanding into new business initiatives like AutoNation Finance and RepairSmith, viewing them as additive and not substitutional to the core business. The goal is to broaden the customer relationship and reduce exposure to cyclical new vehicle sales.

Capital Allocation and Financial Position

Capital allocation remains balanced, with continued investment in growth initiatives like AutoNation USA, disciplined M&A, and significant share repurchases. The company maintains a strong balance sheet and investment-grade credit rating.

Overall, the key message is that AutoNation has transformed its business model to be more resilient through economic cycles, while also investing in initiatives to expand its customer relationships and reduce reliance on new vehicle sales. This suggests the company is well-positioned for long-term value creation.

Earnings Call Analysis 2023 Q1

Inventory Levels and New Vehicle Margins

AutoNation expects inventory levels to continue improving, targeting a 30-45 day supply, which should help stabilize new vehicle margins. However, some moderation in new vehicle gross profits is expected as inventory recovers. The company is cautiously optimistic that OEMs will maintain discipline on production and inventory levels, having learned from the pandemic experience.

Used Vehicle Sourcing and Margins

AutoNation is confident in its ability to self-source used vehicles, leveraging its franchise dealer network. However, the company expects tight supply of 2-4 year old used vehicles, which could pressure wholesale and retail used vehicle prices. The company plans to maintain used vehicle inventory around 30-40 days to remain reactive to market conditions.

Aftersales and Recurring Revenue Opportunities

AutoNation is focused on growing its aftersales business, which has seen double-digit sales growth and margin expansion. This provides a more recurring revenue stream. The acquisition of RepairSmith expands AutoNation’s service offerings and reach, allowing it to service more customers beyond its franchise dealer network.

Capital Allocation and Growth Initiatives

AutoNation will continue to be disciplined in its capital allocation, with share repurchases remaining a priority when attractive. The company is also investing in growing its AutoNation USA used vehicle stores and expanding its in-house finance capabilities (CIG Financial) in a measured, IRR-driven approach.

Implied Analyst Questions

Analysts are focused on the sustainability of new and used vehicle margins, the impact of rising interest rates on finance and insurance (F&I) performance, and the pace of growth in AutoNation’s newer initiatives like RepairSmith and CIG Financial.

Overall, the key message is that AutoNation is focused on diversifying its revenue streams, improving operational efficiency, and maintaining a disciplined approach to capital allocation – all with the goal of creating long-term shareholder value.

Earnings Call Analysis 2022 Q4

New Vehicle Inventory and Margins

New vehicle inventory remains constrained, but is improving slightly with increased shipments from automakers. However, supply is still historically low, supporting elevated new vehicle margins.

Used Vehicle Margins

Used vehicle margins have normalized after the unusually high levels seen last year, but remain above the low point of Q1 2022. Managing used inventory levels and mix is a key focus.

Aftermarket Sales and Customer Financial Services

Aftermarket sales and customer financial services (CFS) are important growth areas that can help offset potential new vehicle margin declines. The CIG Financial acquisition is expected to further expand the CFS business.

Cost Discipline

The company remains focused on cost discipline, with SG&A as a percentage of gross profit well below pre-pandemic levels. This provides a buffer against potential economic downturns.

Capital Allocation

AutoNation is actively managing its capital allocation, with significant share repurchases and strategic acquisitions, while also investing in growth initiatives like the expansion of AutoNation USA used car stores.

Profitability Outlook

The company seems cautiously optimistic about maintaining elevated profitability, even as new vehicle margins may moderate, by leveraging the strength of its aftermarket and CFS businesses.

Overall, the key insights point to AutoNation’s focus on operational efficiency, diversifying revenue streams, and prudent capital allocation – all of which could support long-term shareholder value.

Earnings Call Analysis 2022 Q3

Demand for new vehicles remains strong despite supply chain constraints

Demand for new vehicles remains strong despite a 25% decline in new vehicle volumes due to supply chain constraints. Strong margins have offset the volume decline.

Used vehicle performance was mixed

Used vehicle performance was mixed, with volumes down 4% overall. There was pressure in the entry-level sub-$20,000 segment, while mid and premium used vehicles saw volume increases. AutoNation is focused on improving its used vehicle mix.

F&I business continues to perform well

AutoNation’s F&I business continues to perform well, driven by strong penetration of optional products like service plans and extended warranties. The acquisition of CIG Financial is expected to further enhance the F&I capabilities.

Structural changes to the business model

AutoNation has made structural changes to its business model, including its ability to self-source used vehicles and focus on improving after-sales gross profit, which have contributed to strong cost management and margin performance.

Expansion of AutoNation USA used vehicle stores

The company remains focused on expanding its AutoNation USA used vehicle stores, with plans to reach over 130 stores by the end of 2026. The CIG Financial acquisition is expected to support the growth of this business.

Pressure in the entry-level used vehicle segment

While the consumer demand remains strong overall, there are signs of some pressure in the entry-level used vehicle segment due to macroeconomic factors. AutoNation is working to rebalance its used vehicle mix to address this.

Strong liquidity and disciplined capital allocation

The company continues to have strong liquidity and a disciplined capital allocation strategy, including share repurchases, which should benefit long-term shareholders.

Overall, the key insights suggest that AutoNation is well-positioned to navigate the current industry challenges and continue its strong operational and financial performance, making it an attractive long-term investment.

Earnings Call Analysis 2022 Q2

Structural Improvements

AutoNation has made several structural improvements to its business that appear sustainable, including a focus on used vehicle sales, customer financial services performance, aftermarket service and parts penetration, and expense control. These embedded improvements help decouple the company from more cyclical factors like supply/demand constraints.

Used Vehicle Strategy

AutoNation has been sharpening its data analytics and decision-making around used vehicle inventory, leading to some temporary margin adjustments in Q1 but positioning the business for improved used vehicle margins going forward.

AutoNation USA Expansion

The company’s used vehicle retail stores (AutoNation USA) continue to exceed expectations and are a key growth opportunity, with plans to expand to over 130 stores by 2026. This provides a path for further used vehicle market share gains.

Captive Financing

AutoNation is considering establishing its own captive financing arm, which could provide more flexibility and control over the customer financing experience, especially for the growing AutoNation USA business.

Disciplined Capital Allocation

AutoNation has been aggressively repurchasing its own shares, which has provided a significant boost to EPS. This suggests the company views its stock as undervalued and that buybacks may be a more attractive use of capital than acquisitions at this time.

Potential OEM Pressure

There are indications that OEMs may seek to exert more control over dealer pricing and margins, which could pressure AutoNation’s new vehicle profitability. The company will need to navigate this dynamic carefully.

Overall, the key insights point to AutoNation’s focus on operational efficiency, used vehicle growth, and disciplined capital allocation – all of which appear to be sustainable competitive advantages for the long-term investor.

Earnings Call Analysis 2022 Q1

Structural improvements in the business model

AutoNation has made structural improvements in areas like F&I performance, used vehicle sales, and SG&A control that should translate into long-term value, not just be temporary.

New vehicle margins

While new vehicle margins may see some mitigation as supply normalizes, the industry has learned from the pandemic and is unlikely to return to the excessively high inventory levels that previously depressed margins. Selling at MSRP may become more common.

Diversification and growth opportunities

AutoNation is looking to expand beyond its core franchise dealership business, including through the creation of a new “Head of Mobility, Business Development and Strategy” executive role. This suggests a focus on exploring new business models and revenue streams.

Capital allocation

AutoNation plans to rebalance its capital allocation, investing more in growth opportunities (both organic and inorganic) while still maintaining a disciplined share repurchase program. The focus will be on generating attractive long-term financial returns.

There are questions around the long-term affordability of vehicles, especially as new EV technology is introduced. This could impact both new and used vehicle demand and pricing.

Overall, the key is that AutoNation is looking to position itself for the industry’s transformation, leveraging its scale, brand, and capabilities to capture new opportunities beyond its traditional franchise dealership model.

Earnings Call Analysis 2021 Q4

Demand for personal transportation remains strong

Demand for personal transportation remains strong, outpacing supply due to ongoing supply chain disruptions. This trend is expected to continue well into 2022, if not 2023.

AutoNation’s strong position

AutoNation is well-positioned to capitalize on this dynamic, with strong self-sourcing capabilities and digital tools in the used vehicle business, allowing them to outperform peers. The expansion of AutoNation USA used vehicle stores is a key growth initiative.

Operational execution and financial performance

The company has demonstrated strong operational execution, with significant SG&A leverage and robust vehicle margins. This has enabled record quarterly earnings and cash flow generation.

Disciplined capital allocation

AutoNation is taking a disciplined, balanced approach to capital allocation, investing in organic growth (AutoNation USA), pursuing strategic acquisitions, and aggressively repurchasing shares (27% of shares outstanding in the past 12 months).

Long-term industry outlook

Management is confident in the long-term outlook and believes the industry has learned valuable lessons from the pandemic, moving away from the “production push, liquidation” model towards a more rational approach that benefits both manufacturers and consumers.

Inflation and consumer sentiment

While inflation is being monitored, management believes consumers are generally happy with the increased value of their existing vehicles, seeing it as a positive rather than a negative.

Overall, the key insights point to AutoNation’s strong competitive position, prudent capital management, and optimism about the industry’s long-term trajectory, despite near-term supply chain challenges.

Earnings Call Analysis 2021 Q3

Inventory Management

AutoNation is navigating the current supply chain challenges well, with new vehicle shipments up 100% year-over-year and only down 6% from 2019 levels. However, there is a healthy debate within the industry about finding the right balance between the old “push” system of high inventory levels and the current situation of very low inventory. AutoNation sees potential for a new model with 30-40 days of supply, rather than returning to the previous 70-90 days.

Digital Capabilities

AutoNation has made significant investments in its digital platform over the past several years, which is now paying off. Over 55% of customers engage digitally first, and the digital tools have improved sales force productivity and profitability. This digital foundation is a key competitive advantage.

Used Vehicle Strategy

AutoNation has aggressively grown its used vehicle business, with 90% of pre-owned vehicles being self-sourced. The AutoNation USA used vehicle stores are performing well, with the newest store in San Antonio reaching profitability in its first full month of operation. This used vehicle strategy is a core part of AutoNation’s growth plan.

Capital Allocation

AutoNation is prioritizing share repurchases over M&A, as it views its own stock as the most attractive investment opportunity at current levels. The company has a strong balance sheet and liquidity position, which allows it to be opportunistic with capital deployment.

Profitability

AutoNation has achieved record profitability, with SG&A as a percentage of gross profit improving significantly. This suggests the company has made structural cost reductions, not just benefiting from the current supply/demand imbalance. Management believes this improved profitability can be sustained going forward.

Overall, the key insights point to AutoNation’s strong execution, digital capabilities, and disciplined capital allocation – all of which position the company well for long-term success, even as the industry navigates the current supply chain challenges.

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The information provided on this blog is for informational purposes only and should not be considered as financial advice. You should consult with a qualified financial professional before making any investment decisions. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal.