Insights

Strong car buyer demand drives up AutoNation shares

While big names such as Apple, Amazon, Facebook and Netflix continue to dominate the direction of the US stock markets, we at Monex Securities remain on the lookout for trading opportunities outside of the familiar blue chips.

As the biggest and most traded stock markets are in the US – including the Dow Jones Index, New York Stock Exchange (NYSE) and NASDAQ – investors have a wide range of opportunities to trade and invest in stocks in different sectors that may not be available in other markets.

In this trading idea, we look at the auto parts and auto dealership industry which has been going through a lot of growth over the past year.

One of the companies experiencing growth in sales and share price appreciation is AutoNation (NYSE: AN), which saw its share price more than double from US$54.55 in October 2020 to US$129.01 in September 2021.

Who is AutoNation and what does it do?

AutoNation is the largest automotive dealer in the United States. Based in Fort Lauderdale, Florida, the company operates over 300 car dealerships in the U.S.

The firm also has six AutoNation USA used-vehicle stores, four auction sites, and 74 collision centres all across 16 states.

AutoNation traced its beginnings as a network of used car superstores in 1997. It then expanded to new car sales and car rentals. Today, AutoNation’s new vehicle sales account for about 51% of revenue with used vehicles, parts, and repair services as well as auto financing contributing to the strong year-on-year revenue.

AutoNation’s strong financials

During its July earnings update, AutoNation said it’s been aggressively boosting its pre-owned inventory due to the limited supply of new cars.

AutoNation reported Q2 adjusted earnings that surged 243% to US$4.83 a share. The strong performance marked the company’s fifth consecutive all-time record quarter, according to AN’s financial report.

The company report said, “Strong vehicle demand has led to faster inventory turnover, and consumers are buying vehicles before they even arrive at our stores.”

The AN management team said they expect the current environment of demand exceeding supply to continue into 2022.  During an analyst briefing, AN also reported:

  • Same-store sales jumped 54% to US$7 billion from the same year-ago period.
  • Reported second-quarter FY21 sales growth of 54% year-on-year to US$6.98 billion, beating the analyst consensus of US$6.02 billion.
  • Domestic segment income rose 106% year-on-year while import segment sales grew 131% year-on-year, and premium luxury segment sales rose 153% year-on-year.
  • Gross profit improved 68% year-on-year to US$1.3 billion.
  • Earnings Per Share from continuing operations of US$4.83 beat the analyst consensus of US$2.58.
  • AutoNation announced that its Board of Directors had authorised the repurchase of up to an additional US$1 billion of stock.

Digital transformation

One of the big factors behind AN’s strong performance is the digitalisation program, which has boosted efficiency in the company’s business processes.

According to AN, rapid digital information and databases are enabling it to move vehicles from purchase to reconditioning, then to sale or delivery much faster. This means increasing the flow of inventory and sales.

The company has reported that approximately 55% of all transactions start from a digital channel, even though most buyers still come to a physical location to complete transactions.

Technical Analysis: AutoNation stock price movement

Five years of volatile activity saw the shares of AutoNation bottom out with a low close of US$22.55 in March 2020. Over the subsequent 18 months, there was a dramatic re-rating of the stock by investors. Twelve months of almost uninterrupted gains saw the stock hit new highs above US$100 in April and May of 2021.

Although some volatility has since returned to the share price, the strong underlying upward trend has extended the gains to new a new record high close of US$129.01 on 29 September 2021.

During 2021, the extension of the upward trend has been accompanied by a growing trading volume.  This is a bullish signal that lends support to the view that the stock is well supported by investors with potential for further gains.

While further volatility and dips in price cannot be ruled out, we favour viewing such moves as corrective while price remains above support in the region of US$100 to US$104.

Analysts’ view and consensus on AutoNation

In a recent report about momentum stocks, Zacks Research, a market research company in the US, highlighted AutoNation as one of the strong qualifiers in this category.

The Zack report said AN’s recent price momentum reflects the growing interest of investors in the stock. “With a four-week price change of 12%, the stock of this auto retailer is certainly well-positioned in this regard,” the report said.

The report emphasized that while any stock can see a spike in price for a short period, it takes a real momentum player to deliver positive returns for a longer time frame. AN meets this criterion too, as the stock gained 24.4% over the past 12 weeks.

As AutoNation confirmed its updated earnings estimates, market analysts covering the stock have also raised their target estimates for the share price.

Zacks Research believes AutoNation has plenty of room to run.

Another favourable analyst recommendation came from Morgan Stanley which upgraded AutoNation (NYSE: AN) to an Equal-weight rating after a previous rating of underweight for the stock.

Morgan Stanley said the recent change of CEO at AN – with Mike Manley’s appointment to the top job – is a significant and positive change for the company.

An analyst at Morgan Stanley said: “Based on our years of experience following the arch of Mike Manley’s career, we believe he can have a potentially transformational impact on AN’s strategy.”

Conclusion

With the ongoing shortage of microchips affecting the automotive industry worldwide and with car prices rising on increasing demand, AutoNation is in a strong and enviable position. Its wide network of car dealerships and operational efficiencies provide a solid base and foundation for more future growth.

Whether the rising car prices may put a dent in consumer demand at some stage or not, the fact is more and more people prefer to buy and drive their own car rather than taking public transport. Whether you’re in the market for a new car or a used one, AutoNation has the car for you.

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