Bill Gates and Eddie Lampert Sold This Company, Should You?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

AutoNation (NYSE: AN) has satiated its shareholders with outstanding performance over the last 5 years. In October 2008, the share price was only $4.43, and it was $48.45 in October, nearly an 11 bagger within this 5-year period. Including the recent decrease in the stock price, AutoNation has delivered a return of more than 150% to its shareholders, whereas the S&P500 has generated a 5% loss. 

<img src="/media/images/user_14219/screen-shot-2012-11-08-at-80957-pm_large.png" />

AutoNation has been a favorite stock in the portfolio of several wealthy individuals, including Bill Gates and Eddie Lampert. Bill Gates made his first purchase of AutoNation in 2008 at around $15 per share, and averaged down to $8 per share. Until November 2011, he held nearly 10.8 million shares in the company. With a longer horizon, Eddie Lampert invested in the company more than 11 years ago. He owned 77 million shares, or 24% of AutoNation until 2010. However, those two gurus have started to reduce their AutoNation stake gradually. Gates just holds nearly 2.4 million shares at the moment. Lampert holds 47.3 million AutoNation shares after selling nearly $34 million in the beginning of November.  Should we follow Gates and Lampert on AutoNation’s position? Let’s dig deeper.

AutoNation is a US automotive retailer with nearly 260 new vehicle franchises from 215 stores in the US. The main revenue contribution has been new vehicle sales, accounting for 54% of total revenue in 2011. Used vehicle was the second biggest category, with 25% of total revenue. The third was sales of parts and services. The firm is operating in three segments with quite similar sales contributions; 34% and 37% of total sales was from Domestic and Import respectively, and 28% were from the Premium Luxury segment. It operated in a lot of states in the US, but three main states, which brought the company the most sales, were Florida, Texas, and California, with 27%, 20% and 19% of sales contribution respectively in fiscal 2011. 

Recently, the company has just announced its third quarter earnings results. Its Q3 revenue was $3.9 billion, a growth of 12% compared to the same quarter last year of $3.5 billion. The growth was mainly due to an increase in new vehicle sales, of $2.24 billion, more than $1.88 billion sales last year. Its net income has grown 15.42%, from $70.7 million last year to $81.6 million this year. Its Q3 EPS was $0.66, marking an incredible growth of 37.5% on $0.48 EPS last year. The EPS growth was due to both an increase in net income and a decrease in the number of shares outstanding.  Currently, AutoNation is trading at $43.48 per share. The total market capitalization is $5.29 billion.

AutoNation and its competitors including Group 1 Automotive (NYSE: GPI) and Sonic Automotive (NYSE: SAH) are quite comparable in their operating figures. 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>AN</strong></p> </td> <td> <p><strong>GPI</strong></p> </td> <td> <p><strong>SAH</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>2</p> </td> <td> <p>1.45</p> </td> <td> <p>0.93</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>8.6</p> </td> <td> <p>4.93</p> </td> <td> <p>4</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>1.1</p> </td> <td> <p>0.6</p> </td> <td> <p>1.1</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>18.6</p> </td> <td> <p>13.9</p> </td> <td> <p>15.7</p> </td> </tr> <tr> <td> <p><strong>Dividend yield (%)</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>0.9</p> </td> <td> <p>0.5</p> </td> </tr> </tbody> </table>

The nature of the business makes those companies have thin net margin. AutoNation has a highest net margin of 2%, whereas net margin of Group 1 and Sonic are 1.45% and 0.93% respectively. It also enjoys the highest return on invested capital, of 8.6%, around two times higher than that of the other two companies. Among the three, Group 1 operates with the least leverage, whereas AutoNation and Sonic have the same Debt/Equity ratio.

My Foolish Take

The firm is considered one of the best automotive dealers in the US, and it has a large economy of scales for growth in the future. Even with the best operating figures compared to the other two competitors, AutoNation has two disadvantages, which are no dividend payment and highest P/E valuation. Because Bill Gates and Eddie Lampert have been selling their shares, I would rather wait for more price contraction before initiating positions in the stock.

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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