AutoNation Car Sales Rise Nicely As Industry Rebounds

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Companies that make and sell cars got encouraging news earlier this month when it was reported that U.S. auto sales in September posted their best showing in 4-1/2 years.

Sales for the month rose 13% from the prior year to nearly 1.2 million new vehicles, according to Autodata Corp. That was above analyst estimates for an increase of less than 9%.

On an annualized basis, September's sales pace rose to 14.94 million vehicles, topping estimates for 14.5 million vehicles and above the pace of 14.1 million vehicles registered in July. It was the highest annualized rate since March 2008, when the U.S. was in the early stages of a deep recession.

Among the companies that benefited wasAutoNation ( AN ), the nation's largest automotive retailer.

AutoNation owns and operates 261 new-vehicle franchises, which sell 32 brands across 15 states. In addition to selling new cars, it sells used vehicles and parts, provides automotive repair and maintenance services, and offers automotive finance and insurance products.

Sales Up 23%

The company reported September sales of 22,982 vehicles, up 23% from a year earlier. That performance was slightly above the 22% gain the company delivered for the third quarter as a whole.

AutoNation and other dealers are benefiting on a number of fronts, says analyst Rick Nelson of Stephens.

For one, the average age of cars in the U.S. is about 11 years, he says, which means there's heavy demand for replacement vehicles. Many consumers who had delayed big-ticket purchases during and immediately following the recession are finally comfortable enough to buy cars again.

Buyers also have more access to cheap financing than they did a few years ago, Nelson says.

"And there's a ton of new product out there with better fuel efficiency and more technology, which helps drive growth," he added. "In addition, used-car trade-in values are really good. That's stimulating the recovery because people are getting good equity in trading."

AutoNation delivered a strong performance across all categories in September. Sales of domestic vehicles rose 10% from the prior year to 6,870 units. Sales of imports gained 38% to 11,854, while sales of premium luxury cars increased 11% to 4,258.

For the entire third quarter, AutoNation's domestic sales rose 12%, import sales climbed 35% and premium luxury sales rose 6%.

News of AutoNation's performance sent its stock price on a sharp rise over the course of several sessions. Shares reached an all-time high of 48.12 on Oct. 9.

The recent good news continues a strong run for AutoNation that began in late 2009. The company has posted 11 straight quarters of sales and earnings growth. During that period, earnings have risen in double digits 10 times, while sales have risen in double digits eight times.

AutoNation mainly competes against smaller independent dealerships. It has a couple of advantages over those rivals, Nelson says.

"Because they are the largest retailer in the industry, they have economies of scale. They can leverage systems across a chain of stores," he said. "They are also the most sophisticated company from a process and technology viewpoint, and that's a competitive advantage."

Moreover, unlike dealerships that sell only one brand, AutoNation sells cars from a variety of manufacturers, and across all categories.

Most of its revenue comes from the sale of new vehicles. During the second quarter, new-vehicle sales rose 26% from the prior year to $2.2 billion. That represented 56% of total revenue.

Used-car sales for the quarter gained 6.7% to $947 million, or 47% of the total. Remaining revenue mostly came from sales of parts and service.

Overall Q2 revenue increased 17% from a year earlier to $3.9 billion, above Wall Street estimates for $3.71 billion.

Earnings climbed 35% to 66 cents a share, topping views of 59 cents.

"The company continued to see a strong new-vehicle selling environment, driven by replacement demand, a healthy credit environment and new product offerings," Clint Fendley, an analyst at Davenport & Co., noted in a report following AutoNation's second-quarter earnings.

Fendley also said AutoNation "benefited tremendously from operating leverage," noting that the company's selling, general and administrative expenses as a percentage of gross profit fell 180 basis points to 69.8%.

"That was much better than our expectation of 71.1%," Fendley noted.

AutoNation is scheduled to report Q3 earnings Oct. 25. Analysts polled by Thomson Reuters expect profit of 67 cents a share, up 40% from the previous year. Full-year earnings are seen rising 28% to $2.48 a share.

Available Locations Are Scarce

In terms of expansion, AutoNation might make the occasional buyout of an existing franchise, but it's unlikely to open a lot of new locations. That's partly because there aren't a lot of new locations available.

Auto dealership locations in the U.S. are strictly regulated by state franchise laws as well as manufacturer agreements, Nelson says.

"In traditional retailing, aHome Depot ( HD ) can open across the street from aLowe's ( LOW ) or aWal-Mart ( WMT ) can open across the street from aTarget ( TGT ), but in this industry dealerships are protected, so there's not a lot of green field openings," he said. "This is an advantage for AutoNation because it limits the amount of competition."

As a result, AutoNation uses a lot of its free cash to buy back shares rather than spend it on expansion or acquisitions.

"It's a very low-risk strategy and an attractive business model with a low fixed overhead," Nelson said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AN , HD , LOW , TGT , WMT

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