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AutoNation Is Pricing In A Recovery That May Not Come

Jun. 13, 2020 5:13 PM ETAutoNation, Inc. (AN)2 Comments


  • AN shares have rallied sharply to near pre-COVID-19 levels.
  • With used car pricing still well off the highs, and tens of millions of lost jobs, I'm cautious on car sales.
  • AutoNation looks fully valued today and is a candidate to be sold.

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One of the many industries that has been heavily impacted by COVID-19 is the entire automotive sector. Economic shutdowns across the world had ripple effects on things like car production through disrupted supply chains, reduced buying activity due to job losses and general uncertainty among consumers, and used car pricing due to reduced demand and too much inventory. None of these things are good, but on the bright side, some of these factors seem to be better than feared.

One beneficiary of this is car dealership behemoth AutoNation (NYSE:AN), which has more than 300 dealerships across the US and a variety of marques. The company is the bellwether in the car retail subsector, and while things are looking up from disaster levels earlier this year, shares look fully priced to me.

AutoNation has posted strong growth in the past decade, with the only down year being 2018. AutoNation has managed to ride the wave of strong economic activity in the US to robust earnings growth despite new car sales numbers leveling off in recent years. It has proven to be a superior operator with a focus on cost controls and profitable revenue growth, not just growth for the sake of growth. However, there are forces in play thanks to COVID-19, and the damage done as a result, that I think AutoNation will have to contend with in the years to come.

First, AutoNation gets about one-third of its automobile retail revenue from used cars, with the balance from new cars. Further, it is split roughly evenly between domestic, import, and premium luxury segments.

Source: Manheim

On the used car front, as we can see above, prices went into free fall earlier this year as buying demand simply dried up in the wake of economic shutdowns. While May saw a very strong

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Josh Arnold has been covering financial markets for a decade, utilizing a combination of technical and fundamental analysis to identify potential winners early on in their growth cycles. Josh's focus is mainly on growth stocks. His goal is efficient and profitable use of capital, which overly rigid buy-and-hold strategies do not allow. Josh is the leader of the investing group Learn more.

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Comments (2)

And they treat there associates so nicely. Fired some of the best people in the industry to keep Mike Jackson in control. Sad. The days of Mike Maroone are over. Associates are just a number.
Yes, and you didn't even mention that covid and stay at home means most Americans are barely driving and most will not feel any need to replace high mileage cars this car or maybe even next year. Also the used car market is being flooded with millions of former rental cars.
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