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Is AutoNation (AN) Stock a Buy After Yesterday's Price Dip?

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AutoNation's (AN - Free Report) shares declined 7.25% yesterday after the company disclosed in its SEC filing that one of its major shareholders Lampert Edward S (who owned 10% stake in the company) sold close to $10 million worth of shares in the last three trading days of last week. Per the SEC filing, the shares were sold at a price range of $120.31-$123.98 per share.

With AutoNation being one of the few promising stocks in the auto space currently, should investors take advantage of this share price fall? We believe so.

AutoNation appears an attractive bet on the shining prospects of the Zacks Auto Retail & Whole Sales industry. While the overall auto sector is one of the worst hit by coronavirus-induced microchip shortage compounded by the Russia-Ukraine war, the auto retail industry has defied the downtrend. The industry has moved up 11.1% over the past year compared with the S&P 500 and the sector’s decline of 8.9% and 27.3%, respectively.

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Auto Retail Space is Going Great Guns

The auto retail industry currently carries a Zacks Industry Rank #25, which places it in the top 10% of more than 250 Zacks industries. The industry is on a roll thanks to strong vehicle demand and high average prices of both new and used cars amid a supply-demand mismatch. The race to invest vast sums in the e-commerce domain is gathering steam, aiding businesses to reach new heights. Digitization is paying off. Auto retailers are on a buyout spree for scale expansion and commercial synergies. All these factors are helping most of the industry participants to register impressive profits, with near-term prospects remaining bright.

AutoNation is a Compelling Buy at the Moment

Considering the industry’s solid prospects and AutoNation’s strong fundamentals, investors should see the latest price dip in the stock as a buying opportunity. Let’s delve deeper into the factors that make AutoNation a lucrative bet.

Growth Drivers in Place: The company’s diversified product mix and multiple streams of income reduce the risk profile and augur well for earnings and sales growth. Its strong footprint, a large dealer network and aggressive store expansion efforts along with brand extension strategy and alliances are praiseworthy.Notably, AutoNation posted the eighth consecutive record numbers for first-quarter 2022.

The buyouts of 11 stores and one collision center from Peacock Automotive Group have boosted AutoNation’s portfolio and are set to add $380 million in its annual revenues. The buyout of Priority 1 Automotive would add approximately $420 million in annualized revenues. Encouragingly, the firm aims to sell 1 million combined new and pre-owned vehicles on an annual basis by 2026, through organic growth, expansion of AutoNation USA and future buyouts.

As of Mar 31, AutoNation had $2.4 billion of liquidity, including $608 million in cash and approximately $1.8 billion under its revolving credit facility. Its times interest earned ratio of 17.02 compares favorably with the industry’s 15.42. Thanks to solid income generation and a strong liquidity profile, the firm is committed to shareholder value maximization, boosting investors’ confidence. 

Its increased focus on cost discipline is anticipated to aid margins. AutoNation is committed to operating at/below 60% selling, general and administrative (SG&A) as a percentage of gross profit in 2022, signaling a major improvement from its 71%-73% range over the last several years. Its SG&A as a percentage of gross profit was 56.6% in the last reported quarter, representing a 610-basis point improvement year over year.

Enhanced digital solutions have helped AutoNation to further boost profitability and market presence. Initiatives like ship-to-home next day, curb-side pick-up option, and buy online, pick-up in stores options are picking pace, driving additional traffic to the company’s website. Omni-channel marketing remains a key component of the company’s long-term strategy and is likely to boost revenues in the future. With the launch of its digital platform AutoNation Express—which enables customers to buy and sell vehicles online, providing them a truly comprehensive and personal experience — the company has stepped up its digitization game.

Other Impressive Tidbits: AutoNation currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. It has outpaced the Zacks Consensus Estimate of earnings in the trailing four quarters, the average surprise being 27.4%. The Zacks Consensus Estimate for AN’s 2022 earnings and sales implies year-over-year growth of 28% and 7%, respectively. Over the past 30 days, the Zacks Consensus Estimate for AutoNation’s 2022 earnings has increased 7 cents a share. The consensus estimate for 2023 has been revised 70 cents upward over the same time frame. The favorable estimate revisions instill investor confidence in the stock.

2 Other Auto Retailers Ripe for Picking

Penske Automotive (PAG - Free Report) : Penske is riding high on its strategic acquisitions. It has become the largest dealership group for Freightliner in North America with the Warner Truck Centers buyout. The buyouts of Kansas City Freightliner, McCoy and Team Trucks 

Centers further boosted Penske’s top line. Over the past 12 months, the company has completed acquisitions or opened new dealerships that would add around $2 billion in annualized revenues.

As part of the firm’s used-vehicle expansion, Penske’s U.S. supercenters have been rebranded as CarShop.PAG is on track to step up its CarShop footprint from its current 23 locations to 40 by the end of 2023, thereby retailing at least 150,000 units by 2023 and generating $2.5-$3 billion in total revenues by the same timeframe. The Penske Transportation Solutions (PTS) joint venture has also been enhancing the prospects of Penske Automotive. We also like PAG’s healthy balance sheet and its commitment to maximizing shareholders' value. 

Penske, which currently carries a Zacks Rank #1, has a VGM Score of A. The Zacks Consensus Estimate for its 2022 sales and earnings indicates a year-over-year uptick of 11% and 14%, respectively. Penske managed to pull off an earnings beat in the last four quarters, with the average being 17.7%. 

Group 1 Automotive (GPI - Free Report) : Group 1's diversified product mix and multiple streams of income reduce its risk profile. The firm’s omnichannel efforts to boost sales bode well. Its digital efforts focused on an online customer scheduling-appointment system are enhancing customer experience. The AcceleRide platform, its online retailing initiative, active at most of the firm’s U.S. dealerships is likely to aid Group 1’s long-term prospects. 

Group 1’s acquisitions of dealerships and franchises to expand and optimize its portfolio are likely to boost the firm’s prospects. In 2021, the company acquired Prime Automotive in the Northeastern United States and the Robinsons Group in the UK, which have diversified Group 1’s footprint and are set to buoy top-line growth. In 2021, Group 1 completed transactions representing $2.5 billion of acquired revenues.GPI’s investor-friendly moves via dividends and buybacks instill optimism.

Group 1, which currently has a Zacks Rank #2 (Buy), has a VGM Score of A. The Zacks Consensus Estimate for its 2022 earnings and sales indicates a year-over-year uptick of 23% and 21%, respectively. Group 1 surpassed earnings estimates in the preceding four quarters, the average surprise being 6.6%.

You can see the complete list of today’s Zacks #1 Rank stocks here


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