AutoNation Shares May Fall To $35 In Q4

| About: AutoNation Inc (AN)

Here we revisit our price model for AutoNation (NYSE: AN), which we have been modeling since 2009. In March 2012, we presented a brand new prediction for AN - we expected no large changes in the first half of 2012. At least the price was not expected to go out of the uncertainty limits as defined by the model standard error of approximately $2. (One also has to take into account that we model monthly closing price, which represents the whole month. High and low monthly values may serve as a natural measure of the price uncertainty as well.) This prediction was right. The AN (monthly closing) price was hovering around $35 before it started to grow in July and reached the level of $44 in September 2012. Our current model shows the price could fall back to $35 in the months to come. The closing price for the 12th of November was $40.56, i.e. approximately 10% down from October's closing price. The model suggests that no recommendation to buy AN should be given and there is no reason to keep it in the short run (few months). We will revisit the model in two-three months.

AutoNation is a company from the services sector (as defined by the S&P 500) and operates as an automotive retailer in the U.S. Here we present the current model which has been obtained by decomposition of the time series of monthly closing share prices (adjusted for splits and dividends) into a weighted sum of two consumer price indices. One might presume that a fast growth in the CPI inherently linked to the AN share price (e.g. energy consumer price for energy companies) relative to some independent by dynamic reference should be manifested in a higher pricing power for the company. Therefore, the task is to find two best (say, in sense of RMS residual error) defining CPIs. It allows testing of the underlying concept (decomposition into CPIs) and to estimate time lags and coefficients for AN.

We have borrowed the time series of monthly closing prices of AN from and the relevant (seasonally not adjusted) CPI estimates through September 2012 are published by the BLS. The evolution of AN share price is defined by the consumer price of rent of primary residence (RPR) and the index of financial service (FS). In March 2012, the defining time lags were as follows: the RPR index leads the price by 10 months and the FS index leads by 5 months. The revised model has only one difference, the lag of RPR is one month longer. The relevant best-fit models for AN(t) are as follows:

AN(t) = -1.89RPR(t-10) - 0.36FS(t-5) + 15.47(t-1990) + 270.31, February 2012

AN(t) = -1.95RPR(t-11) - 0.37FS(t-5) + 16.08(t-2000) + 439.34, September 2012

where AN(t) is the AN share price in U.S. dollars, t is calendar time. This model is valid since August 2011 with the same lags and coefficients. Figure 1 displays the evolution of both defining indices since 2002. Due to the negative coefficient (slope), the sharp drop in the FS index in 2009 best explains the jump in the share price five months later.

Figure 2 depicts the high and low monthly prices for the share together with the predicted and measured monthly closing prices. The predicted prices are well within the bounds of the share price uncertainty before June 2012 and then the curves deviate. This deviation has been growing and presented the challenge to the model. It also supposed that the probability for the price to fall has been increasing with time. The model residual error is shown in Figure 3 with the standard deviation between July 2003 and September 2012 of $2.01.

Both CPIs have negative influence on the share price. Therefore, the price should decrease when the indices grow fast.

Figure 1. The evolution of the index of rent of primary residency (RPR) and the index of financial service (FS).

Figure 2. Observed and predicted AN share prices.

Figure 3. The model residual error: stdev=$2.02.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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