Standard & Poor's 500 component AutoNation (AN, Financial) reported 0.4% sales growth to $5.14 billion and 2.3% profit growth to $98.1 million in the first quarter – same as the 1.9% margin it had in the year-prior quarter.
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”During the first quarter, we saw increasing used unit volumes as we focused on our One Price strategy, which is now fully rolled out at all AutoNation stores, and worked through the majority of the inventory that was previously on recall hold. We expect to see a sequential increase in the second quarter in both used unit volumes and gross profit per vehicle retailed."Â –Â Mike Jackson, chairman and CEO
AutoNation shares reacted barely with -0.41% return at market close post-earnings release.
Total returns
The Fort Lauderdale, Florida-based auto and truck dealership company delivered total losses of 17.1% to its shareholders in the past year compared to the S&P 500’s 17.9% total gains (Morningstar data).
Valuations
AutoNation trades at a discount to its peers with a trailing price-earnings (P/E) ratio of 9.9 times vs. the industry median 17.9 times, a price-book (P/B) value of 1.75 times vs. 1.7 times and a price-sales (P/S) ratio of 0.2 times vs. 0.8 times (GuruFocus data).
The company has not provided any dividends to its shareholders in the past three fiscal years.
Meanwhile, AutoNation has multiples of 0.19 times and 10.7 times on average fiscal 2017 sales and earnings-per-share expectations.
AutoNation
AutoNation was founded by entrepreneur H. Wayne Huizenga in 1996. According to filings, AutoNation through its subsidiaries is the largest automotive retailer in the U.S.
As of March 31 the company owned and operated 372 new vehicle franchises from 259 stores located in the U.S., predominantly in major metropolitan markets in the Sunbelt region.
AutoNation stores sell 35 different new vehicle brands with core brands of new vehicles representing approximately 93% of the new vehicles that the company sold during the three months ended March 31 were manufactured by Toyota (TM, Financial) (including Lexus), Ford (F, Financial), Honda (HMC, Financial), General Motors (GM, Financial), FCA US, Mercedes-Benz, Nissan (NSANY, Financial)(TSE:7201, Financial), BMW (XTER:BMW, Financial) and Volkswagen (XTER:VOW, Financial)(VLKAF)(VLKPY)(XAMS:VWA)(XSWX:VW-V) (including Audi and Porsche).
AutoNation also owns and operates 70 AutoNation branded collision centers.
AutoNation offers a diversified range of automotive products and services, including new vehicles, used vehicles, “parts and service,” which includes automotive repair and maintenance services as well as wholesale parts and collision businesses, and automotive “finance and insurance” products, which include vehicle service and other protection products, as well as the arranging of financing for vehicle purchases through third-party finance sources.
(10-K)
As of March 31 AutoNation had three reportable segments: Domestic, Import and Premium Luxury; whereby the franchises in each segment also sell used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products.
In the first quarter, AutoNation derived 54% of its sales from new vehicles sold, 24% from used vehicles sold and 21% from parts and service, and finance and insurance operations. The latter group, however, generated the most of AutoNation’s total gross profit with 72%.
(10-K and 10-Q)
Domestic
AutoNation’s Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors and FCA US.
In the first quarter, sales in the Domestic segment fell 2.6% to $1.8 billion or 35.7% of total AutoNation sales excluding corporate and other adjustments. The segment also delivered a segment income* margin of 3.4% vs. 4.2% in first-quarter 2016.
*AutoNation: Segment income represents income for each of our reportable segments and is defined as operating income less floorplan interest expense.
(10-K and 10-Q)
Import
AutoNation’s Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda and Nissan.
In the first quarter, sales in the Import business fell by 2.6% to $1.63 billion or 32.3% of total unadjusted company sales and delivered a segment income margin of 4.4% vs. 4.5% in first-quarter 2016.
(10-K and 10-Q)
Premium Luxury
AutoNation’s Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes-Benz, BMW, Lexus and Audi (XTER:NSU).
In the first quarter, sales in Premium Luxury grew by 5% to $1.62 billion or 32% of total unadjusted company sales with a segment income margin of 5% vs. 5.4% in first-quarter 2016.
Total revenue and net income
(10-K and 10-Q)
On average, AutoNation had three-year sales growth of 7.3%, profit growth of 4.7% and profit margin of 2.1% (Morningstar data).
Cash, debt and book value
As of March, AutoNation had $56.3 million in cash and cash equivalents and $1.78 billion in debt with a debt-equity ratio of 0.73 times vs. 0.84 times the same period last year.
Of AutoNation’s $10.1 billion assets 21%Â were identified as goodwill and intangibles having had a book value of $2.43 billion vs. $2.1 billion in first-quarter 2016.
Cash flow
(10-Q)
In the first quarter, AutoNation’s cash flow from operations declined by 6.4% to $185.6 million resulting from higher cash (out)flow mostly from inventory and vehicle floorplan payable.
Capital expenditures including property operating lease buy-outs were $93.4 million leaving AutoNation with $92.2 million in free cash flow vs. $138.5 million in first-quarter 2016.
(10-K and 10-Q)
For the recent quarter, cash flow from stock option proceeds exceeded AutoNation’s share buyback activities. While on average, the company has allocated 141% of its free cash flow in share buyback activities.
In review, AutoNation spent $1.2 billion in repurchasing 23.8 million of its outstanding shares from fiscal 2014 to 2016. This would indicate an average share price purchase of $51 to $53 a share by AutoNation vs. today’s share price of $42 (at the time of writing).
(10-K and 10-Q)
In the first quarter, AutoNation also prioritized in allocating cash flow toward debt repayments.
Conclusion
In the quarter, AutoNation's business experienced a slowdown that is reflective of weakening sales experienced by some of the car manufacturers themselves.
Nonetheless, the company was able to tame this overall sales weakness brought by its Premium Luxury business and interestingly by its Corporate and other segment – which delivered a 34.2% sales growth in the first quarter.
According to filings, its Corporate and other segment comprised of the company’s other businesses, including collision centers and auction operations, all of which generate revenues, as well as unallocated corporate overhead expenses and retrospective commissions for certain financing and insurance transactions that AutoNation arranges under agreements with third parties.
AutoNation also carried a less leveraged balance sheet when compared to last year’s operations albeit certainly carrying some goodwill and intangibles in it. The company also remains an active buyer of its shares in recent years having spent well above of today’s share price –Â on average.
(AutoNation share price and price-sales ratio, GuruFocus)
Ten analysts have an average share price target of $48.5 – a 15.5% upside from the share price of $42 (at the time of writing). Using three-year sales growth and P/S multiple averages followed by an application of 20% margin would indicate a value of $54.9.
In summary, AutoNation is a speculative buy with $49 per share target price.
Disclosure: I do not have shares in any of the companies mentioned.
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