Investors in AutoNation (NYSE:AN) ended the past week on a very strong note following a big analyst upgrade.
I personally believe that Goldman's upgrade was a bit late in the game. Given the point in the cycle, the high valuation and very strong momentum I'm much more cautious. AutoNation has not grown its operations over the past decade, but instead has relied on share repurchases to drive per-share metrics.
I'm not willing to pay 18-19 times earnings for a business which is not growing at all, even if it returns all the cash it makes to investors. I remain on the sidelines.
Goldman's Big Upgrade
Analysts at Goldman Sachs (NYSE:GS) raised their rating on AutoNation from neutral to a buy. At the same time, the investment bank hiked its price target by nine dollars to $65 per share.
Analyst Patrick Archambault calls AutoNation the best idea to invest in M&A and SAAR upside. The strong growth outlook, better core efficiency metrics and best in class industry margins further rationalize the move.
The 100% leverage to the US market will bode well given the upward revision of the bank's SAAR forecast as well as increased dealer acquisition activity.
As a result, Goldman hiked its 2014 earnings per share price target by four cents to $3.45 per share while next year's earnings are seen eleven cents higher than its previous forecast. Goldman now sees 2015's earnings at $3.99 per share.
Recent Sales Figures Show Solid Momentum
Earlier this month, AutoNation reported strong sales numbers for the month of May. The company sold 30,275 new vehicles which made it the best month of May since 2006.
Reported sales numbers were up by 15%, or 12% on a comparable basis. Both domestic, import and premium luxury sales were up in their double-digits.
The results and growth are very solid. For the month of April, AutoNation reported a 14% jump in vehicle sales which came in at 25,669 for the month.
Back in April, AutoNation released its first quarter results. The company posted first quarter revenues of $4.36 billion which was up by 6.5% on the year before. Reported earnings rose by 14.6% to $95.1 million for still very slim profit margins.
The company ended the quarter with merely $69.2 million in cash and equivalents. Non-vehicle indebtedness stood at $1.80 billion while floorplan notes payables totaled $2.84 billion.
For the year of 2013, AutoNation posted revenues of $17.5 billion on which it net earned $375 million.
Trading around $59.50 per share, AutoNation's equity is valued at $7.1 billion which values equity in the business at 0.4 times annual revenues and 18-19 times annual earnings.
The company does not pay a dividend at the moment, instead it is repurchasing its own shares in a steady manner.
Some Historical Perspective
Over the past decade, AutoNation has not made that much operational progress. The company posted revenues of $19.4 billion in 2004. Revenues slumped to just $10.8 billion in 2009, but revenues have failed to recover to those levels ever since. As a matter of fact, the company's $1.24 billion loss in 2008 wiped out cumulative profits in the four years ahead.
The company's earnings improved to $375 million. On a per share basis, the story is completely different after the company retired 55% of its shares outstanding over the past ten years, thereby providing a huge boost to earnings per share. The impact of share repurchases, the strong equity markets and low interest rates have propelled shares higher. Shares fell from $20 before the crisis to just $5 in 2008, before steadily increasing to current levels at $60.
For me the appeal is already over, just like large segments of the general stock market. The valuation at 18-19 times earnings looks fair, especially given the recent growth, yet note that revenues are not even at levels reported a decade ago.
The solid and impressive pace of share repurchases does definitely warrant a great deal of the run-up in the shares. At current levels shares are simply priced to close to perfection given the strong car market and low interest rates.
As such I don't necessarily share Goldman's optimism and will take a more cautious stance on the sidelines.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.