Fahroni
Last year we first recommended buying AutoNation (NYSE:AN) stock for a short-term, rapid-return trade. We felt that it could shoot much higher over $100. Fast forward 5 quarters, and now the entire macro landscape has changed. The VIX is now over 33 here folks, which is approaching panic levels. Not quite full capitulation, but today is a good sign of one. This morning stocks opened much higher and fell all day. We think people who have had losses took the first green bump to sell for “slightly” less of a loss. Our firm stands by a bottom being made in October and a rally into year-end. Earnings will be key. If they do not come down all that much, it’s a very good sign. AutoNation stock has not been immune to the chaos but actually has held up much better than the average stock. We are still over $100 believe it or not, and a few points off a 6-month low. We are still down about 20% however in a month when shares peaked in late August. We think shares are now a buy.
Look, the consumer remains strong. The economy is still humming even if the Fed is doing all it can to slow the economy to help fight inflation. While inflation is rampant, the price of used and new vehicles remains elevated, even if it is stabilizing. We have to tell you, we like stocks in the car space, especially those that deal in used cars, as the economy weakens. It may take some time to percolate, but you see demand for new cars go down and used up generally when the economy weakens. A wild card is financing rates, as rates come up, auto loan rates go up too, making it harder to afford more expensive cars. In turn, prices can come down, but you will see used cars get more attention. That is how we see it. We still like stocks in this space, and AN is a favorite among our traders.
Now while there are a number of competitors in the space, AutoNation has a lot of room for growth before it is even close to saturating the market. Right now the company has a series of automobile dealerships that are located in many states in the U.S, but they have the greatest market share in Florida, Texas, and California, where nearly 2/3 of its revenue is generated. There is a lot of room for this company to expand its network across the U.S.
And the company is still growing. In the recently announced Q2 earnings we saw that results were stellar. In fact, it was record setting for earnings, though sales dipped some. It is our opinion that upside remains for the medium- and long-term, and you should buy this meaningful decline in the stock. Longer-term we really like what we are seeing. The stock is attractive on valuation and growth. We think you should buy it, especially if shares fall below $100. There is strong earnings power, and generally improving same-store sales, and room for growth as reasons to buy. Let us not forget, management has been offering us lucrative repurchases. In fact, the company just authorized another $1 billion repurchase.
We like shares after this 20% pullback. Q2 revenue was $6.9 billion, a decrease of 2% compared to the year-ago period.
Now, we said we liked used cars, and those revenues are up vs. new cars. New vehicle revenue declined 14% compared to the year-ago period while used vehicle revenue increased 13% compared to Q2 2021. Big increases.
Both new and used cars are still selling well, though we do expect higher rates to weigh some here on demand. Looking ahead, we see more used units being sold. Margins are strong too. The used car market is on fire. While prices may start to turn over as the ‘inflation’ seen here is likely to normalize some, the volumes remain strong. Margins drove the major earnings beat though. New vehicle gross profit per vehicle retailed was $6,106, up $1,953 or 47% compared to last year. Used volumes were up, but margins were pinched here some as prices have begun to normalize. Used vehicle gross profit per vehicle retailed was $1,915, a decrease of $324 or 14% vs a year ago, but up 22% compared to the sequential Q1. There is a bit of randomness to it, depending on the makes and models being sold.
Margins are improving dramatically, continuing a trend over the last 3 years. Gross profit totaled $1.4 billion, an increase of 3% compared to the year-ago period. The higher rates are helping the financing side of things as well. Customer Financial Services’ gross profit per vehicle retailed was $2,724, up $385 or 16% versus a year ago.
From an earnings standpoint, the company had a record for EPS. Due to better margins and a reduced float from buybacks, the company registered $6.48 in EPS this quarter, handily surpassing estimates by $0.26. The ongoing repurchases will likely dramatically improve shareholder value. In Q2 they repurchased 3.7 million shares of common stock for an aggregate purchase price of $404 million. This company continues to reduce the float year after year. It is a winner.
To help fuel growth, the company is also purchasing CIG Financial to expand its capabilities and enhance their customers’ buying experience. This continues a long run of buying other companies and expanding. We love it.
As we look ahead, the economy is questionable, but cars will always have a strong demand. People need to get around. Simple as that. This company has repurchased a ton of shares. They also have $2.1 billion of liquidity, including $337 million in cash and approximately $1.8 billion of availability under its revolving credit facility. Plenty to work with.
From a valuation perspective, without any EPS forecast changes from analysts, at the consensus of $24.62, the stock trades at 4.3X FWD 2022 EPS. This is laughable. It is incredibly attractive when we factor in ongoing repurchases and the fact that earnings continue to grow. We continue to rate shares a strong buy, and we think you should do so on any meaningful pullback.
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