AutoNation (NYSE:AN) is America's largest specialist automotive retailer. The very statement encourages readers unfamiliar with the company to jump to conclusions. Just weeks after the formal demise of GM (GMGMQ.PK) and Chrysler, hasty journalists need to be restrained from writing the retailer’s epitaph, exercising tired sound-bites about the demise of a once fine industry then maybe just adding a token chart, almost as an after thought.
That route of analysis is fundamentally flawed. Never judge a book by its cover and never write-off a company because it’s in a beaten-up sector. AutoNation needs GM and Chrysler as much as an Eskimo needs a swim suit – not at all. The impact of GM’s notification that six of AutoNation’s dealerships (out of approximately 230) were identified for closure represents about 0% of AutoNation’s 2008 operating income. Zero impact. Chrysler is almost as insignificant. The seven AutoNation dealerships highlighted in the Chrysler consolidation plan equate to just 1% of the dealer’s 2008 operating income. Incredible but true. But then AutoNation does retail the vehicles of 35 other manufacturers. That’s what you call diversification.
The next hasty and incorrect conclusion would be to look back to the 1950s for the historical roots of AutoNation. Surely the largest pure-play auto retailer built its foundation for success in the great era of vehicle sales growth? Not at all. Try 1996. No wonder the firm has been voted America’s most admired auto retailer, by Fortune Magazine, five times in eight years. But then being the first firm to sell 7 million vehicles does tend to attract attention.
Strategically, AutoNation continues to focus on import brands and the higher-end of the market. Business conditions remain very challenging and the recession will continue to hold back revenue and unit margins for some time. 2008 data highlighted 59% of dealer’s revenues were derived from new sales, 29% from used and 12% from servicing and parts. As consumers continue to delay a new vehicle purchase, that ratio is likely to change as owners increasingly need to service and repair their aging autos rather than choose the more expensive trade-in option.
The AutoNation Chairman and CEO, Mike Jackson, has led the business ably since 1999. In a famous 2006 New York Times interview he was asked what auto he drove to work in. “A Mercedes-Benz”, replied Jackson. That tells you everything you need to know about AutoNation and unfortunately GM.
Moving onto the firm’s valuation, the stock has had a stellar run since recovering from the oversold position late in 2008. It’s difficult to identify reasons why the stock should continue that upward momentum, at least in the short-term. At $16.76 it’s a hold at best. If the wider stock market retreats, I would gladly short AutoNation confident of a near-term profit, on the expectation the stock should underperform (fall quicker), as investors aggressively short the stock or take profits following its spectacular run from $4.00 (October 2008). If the market resumes its upward path, I would look for long opportunities elsewhere. Great company and well managed, but not an eye-catching long opportunity at the current price.
Disclosure: The writer does not hold any financial instrument that provides direct or indirect exposure to companies mentioned in this review.