This Auto Retailer Is Riding the Auto Industry Boom
Nicholas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The U.S. automobile industry’s recovery from the declines of four years ago promises a massive upside over the next two years. Some analysts even believe that favorable interest rates and affordable labor could sustain the current boom for several years. The industry seems to be turning the tables against Japan, which has been the benchmark over the last few years.
For instance, Honda Motors whose majority of auto imports came from Japanese-made cars, expects to import more vehicles from North America with nearly all of them coming from the U.S. by the end of next year, reports the Wall Street Journal. The major U.S auto manufacturers also expect to increase their exports through 2014 with Chrysler projecting 0.5 million exports outside of North America per year. According to the U.S International Trade Administration, more than one million cars and light trucks shipped from U.S. auto plants last year, the highest recorded and a more than threefold rise from 2003.
While the U.S. auto manufacturers are reporting record sales, so are the retailers. For instance, AutoNation (NYSE: AN) reported a 10% surge in auto sales during the month of June, which is in tandem with the industry. Chrysler’s auto sales surged 8.2% last month, while General Motors reported an increase of 6.5%. Likewise, Ford posted a 13% increase in its June sales.
AutoNation is up 14.35% year-to-date, which is well above industry rivals. Group 1 Automotive (NYSE: GPI) is up just 4.08% year-to-date while Penske Automotive (NYSE: PAG) trades at 0.98% upside of its closing price last year. On the other hand, Sonic Automotive (NYSE: SAH) is down 0.14%.
The auto retail segment dominates AutoNation’s revenue model, which accounts for nearly 80%. On the other hand, parts and service contributes about 15% of the overall revenue. Therefore, the 10% surge in auto sales coupled by the industry boom, means that AutoNation is bound for an upside going forward. Ideally, 100% of AutoNation’s income depends on the success of the automobile industry.
Group 1 Automotive announced on June 6, the disposition of 4 major dealerships, which at the time generated a trailing twelve-month revenue of $176.7 million. The company expects to make a pretax profit of $8.3 million from the disposals.
On June 20, the company agreed to a $1.7 billion revolving credit arrangement with 25 financial institutions expiring in 2018. The arrangement has $1.38 billion set for inventory floor plan and $320 million for working capital. Group 1 Automotive also revealed that it acquired a Ford dealership in Louisiana, which is expected to generate $80 million in annual revenues.
Overall, the company disposed nearly $100 million worth of annual revenues, following the acquisition of the Ford dealership.
Penske Automotive recently increased its quarterly dividend by 7% following strong performance and cash generation. The first fruits of the increased dividend were harvested on June 3. This will serve as a motivation to the shareholders of the company, given the fact that its performance remains flat so far this year.
Meanwhile, Sonic Automotive, which is expected to announce its second quarter results on July 23, inked a three-year, multimillion dollar agreement with Lextech for mobile app development to help the company better engage with customers from the moment they step into a dealership.
This should boost customer service delivery for the company, thereby enhancing loyalty. Sonic Automotive has more than 100 auto dealerships in 15 states. Analysts expect the company to report second quarter earnings of $0.52 per share.
Performance and valuation
AutoNation’s most recent quarter revenues grew by 12% year-over-year. This compares to Group 1 Automotive’s 18% growth, and Penske and Sonic’s 8% each. AutoNation’s gross margin slightly beats its rivals’ at 16%, while the trio of competitors has 15% each. The same is replicated in the operating margin, with AutoNation posting 4%, compared to trio’s 3% each.
AutoNation’s price to earnings, or P/E, ratio of 17.15 times compared to Group 1’s 15.97, Penske’s 14.19 and Sonic’s 13.43 demonstrates that investors are placing more value on its shares over the rivals'. This is based on its strong fundamentals and bright outlook.
The bottom line
AutoNation, America’s largest Auto retailer, has the best fundamentals among its rivals. The booming U.S. auto industry guarantees continued revenue growth for the Fort Lauderdale, Florida-based retailer.
Investors also seem to have noticed this as they already value the company highly compared to rivals. This auto retailer offers investors the best option in investing in the auto retail business in the anticipation of a continued boom in the overall industry.
Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!