5 Reasons to Buy AutoNation

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

I’m sure that everybody has heard this from a lot of portfolio managers and consultants: “diversifying your portfolio is important.” The reason primarily to do so is to spread the risks by not betting on one single company. Companies are similarly advised to do so with their business decisions and approach. When we invest in a company that hasn’t diversified its operations, the risk exists that a technology or paradigm shift might render the profitability of the company unsustainable. But a company that has too many of its operations diversified sometimes makes it tough to focus on its core competencies and even more difficult to stage a turnaround.

I was reading articles on diversified businesses and that’s when the idea investing in multi-brand car dealerships struck me. Such companies do not rely solely on the performance of a single brand, but rather on the entire automobile industry. AutoNation (NYSE: AN) is one such company, and here are a few reasons why investing in this company would be a good idea.

Diversification

AutoNation is the largest automotive retailer in the United States and as of June, the company owns and operates dealerships of more than 260 vehicle franchisees. The company deals in 32 international and domestic automotive brands, with major players like Ford, GM, Nissan, and Honda. Additionally the company also deals in premium cars like BMW and Mercedes Benz.

AutoNation is also involved in servicing and repairing cars, offering customers all sorts of vehicle protection products. The company also deals in the used vehicles segment, which accounted for around 25% of its sales in the first half of 2012. The kitty of automobile brands and services the company offers makes the business model well diversified, while at the same time sticking to the core competencies.

Financials

AutoNation recently posted results that beat the market expectations. The company’s adjusted earnings saw an upside of 35% pushing the EPS up to $0.66 from $0.49 in the same quarter last year, with the expected EPS was $0.59. Profits surged 12% up to $81.6 million and the total revenues of the company rose 17% up to $3.9 billion, all figures in comparison to the same quarter last year. The operating income too joined the party by surging ahead to $164.2 million, up 13.7% from $144.44 million in the year ago quarter. Gross profit was up 7.6% to $628 million, and the results turned out to be a blockbuster for investors, being spectacular.

The Buyback Frenzy

AutoNation has been buying back its shares aggressively. In 2010, the company re-purchased 26.6 million shares from the open market, followed by a repurchase of 18.6 million shares in 2011 and 17.5 million shares repurchased in the first half of 2012. When a company decides to repurchase its shares, it’s either to retain investors when the company is not performing well or because the board firmly believes in the future of the company. Clearly the company has been posting good results, which highlights the amount of faith and belief the board has in the company and its future.

Outperforming the Industry

The company has been continuously outperforming the industry in the sales increase of new vehicles. Sales of new vehicles were up 29% in the second quarter of 2012, while the average increase of the industry was only 15%. A company that’s beating the industry is certainly the kind of stock that investors want to invest in. The company has built a reliable brand image and is able to capitalize on it. Some of the competitors of AutoNation are Penske Auto Group (NYSE: PAG), Asbury Automotive Group (NYSE: ABG) and Sonic Automotive (NYSE: SAH). The net profit margin of Asbury automotive group stands at 1.55%, and the profit margin of Penske Auto Group is 1.59%. When comparing the companies, the margins of both the companies stand at least 25% lower than AutoNation’s. Sonic Automotive has an even lower profit margin of around 1%, which is a significant 50% lower than AutoNation’s 2%. It’s a fact well known to all, that the profit margin is the bloodline of any company, the fatter it is, the healthier the company is. Using this analogy, AutoNation turns out to be the healthiest company of all the competitors mentioned.

 Fundamentals

 

Shares of AutoNation trade at 18.76 times the P/E and have a PEG of 0.91 clearly showing that the stock has some room to appreciate. According to analysts the EPS of the next year stands around 13% and the projected EPS for the next 5 years stands at over 20%. With a market capitalization of around $5 billion, the company appears to be a good investment option fundamentally speaking.

The Foolish Takeaway

AutoNation has a diversified business model, which has close ties to the core competencies of the company. The company has posted better than expected results this quarter and also has been beating the market consistently in terms of growth. The company’s fundamentals suggest that there might be a further upside in the price of the stock. Also the stock repurchase shows the amount of faith the board has in the company’s future. Additionally the profit margin that AutoNation enjoys is the highest amongst its mentioned competitors and to put it simply, all these reasons suggest an upside in the stock’s price, over the medium to longer term. The stock has a Foolish buy rating.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Asbury Automotive Group. 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.

blog comments powered by Disqus