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Why You Should Hold on to AutoNation (AN) for the Long Haul

Zacks.com logo Zacks.com 1/13/2021

Demand for cars is on the rise amid growing preference of personal mobility versus public transport and ride-sharing services, thanks to coronavirus-led social distancing milieu. Easier credit conditions are also aiding consumers to spend on these big-ticket items. Another thing that has played a big role in car purchases is the extent of digitization provided by the seller. Customers increasingly want to avoid personal contact while selecting or paying/arranging finance. So there’s a growing wave of people opting for digital channels. Consequently, retailers are leaving no stone unturned to rev up e-commerce initiatives.  

Amid the backdrop, AutoNation AN — one of the leading auto retailers of the United States — is faring well on the bourses and is poised to maintain momentum. Over the past six months, shares of AutoNation have rallied 87.4%, outperforming the industry’s 79.8% growth.

Six-Month Performance

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AutoNation — which shares space with Sonic Automotive SAH, Group 1 Automotive GPI and Lithia Motors LAD — has an impressive VGM Score of A. This style score condenses all the essential metrics from the company’s financial statements to get a true sense of quality and sustainability of growth. AutoNation has a long-term expected EPS growth of 9.7%. The firm’s earnings estimates for 2021 have moved up by 3 cents in the past seven days to $6.72 a share. The consensus mark for 2021 sales implies 6.6% year-over-year growth. Let’s see why you should consider retaining this Zacks Rank #3 (Hold) stock in your portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AutoNation’s diversified product mix and multiple streams of income bode well and help it reduce its risk profile. The company generates income from businesses including used and new vehicle retail, finance, insurance, as well as parts and services. Diversified portfolio positions it well for top and bottom-line growth. Importantly, the used vehicle business is especially a bright spot amid coronavirus-led uncertain economic environment, with consumers getting more inclined toward used vehicles rather than splurging on new cars.

Strong footprint, large dealer network and store expansion efforts, along with brand extension strategy and alliances bode well. AutoNation intends to build in excess of 100 stand-alone pre-owned vehicle stores, with more than 50 by 2025-end, which offers growth visibility. The company aims to synergize network and create an efficient core business. It is focusing on customer-based brand extension strategy. This includes the expansion of AutoNation USA stand-alone pre-owned vehicle sales and service centers.

Enhanced digital solutions will help AutoNation to further boost profitability and market presence. The auto retailer continues to invest in digital capabilities that enable customers to buy and sell vehicles online, thereby providing them with a truly comprehensive and personal experience. Moreover, ship-to-home next day, curb-side pick-up option, and buy online, pick-up in stores options are picking pace, driving additional traffic to the company’s online site. In fact, omni-channel remains a key component of the company’s long-term strategy and is likely to boost earnings in the future. Investors should note that AutoNation boasts an impressive earnings surprise history, having surpassed estimates in each of the trailing four quarters, with an average of 95.4%

Increased focus on cost discipline will further aid margins. AutoNation is targeting to operate below 68% selling, general and administrative as a percentage of gross profit. It has been operating in the 71-73% range over the past several years. Strong balance sheet of the firm, with low leverage and high liquidity, is another positive. Leverage of around 38% increases its financial flexibility to tap onto growth opportunities. Encouragingly, during the last reported quarter, AutoNation increased the share-buyback authorization to $500 million, underscoring its commitment to return value to shareholders.

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