Scaling AN Finance Aims For Profitability By 2025 Amid Operational Efficiencies

Key Takeaways

• AN Finance's growth and increased interest income are expected to enhance net margins and boost overall earnings as it scales.
  
• Strategic divestments and capital redeployment into share repurchases aim to improve return on equity and earnings per share.
  
• Temporary luxury vehicle sales boost margins, but high floorplan debt and tariff risks threaten revenue and profitability amid competitive staffing challenges.

Catalysts

Through its subsidiaries, operates as an automotive retailer in the United States.

• AutoNation's AN Finance has significant growth headroom, with only a 12% penetration of their franchise store finance volume. This is expected to drive future net interest income and contribute to earnings as the business scales.
  
• Same-store new unit volume growth of 12% in Q4 2024 is expected to bolster future After-Sales and Financial Services revenue, as new vehicle sales feed into these higher-margin segments.
  
• The company anticipates achieving profitability in AN Finance by the end of 2025 as they scale operations, which should positively impact net margins and overall earnings.
  
• Reduction in operating expenses at AN Finance coupled with a 40% increase in interest income year-over-year is projected to enhance net margins as the finance segment continues scaling.
  
• Strategic capital allocation, including divesting non-core stores and redeploying capital into share repurchases, is expected to improve return on equity and boost EPS through a reduced share count.

AutoNation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AutoNation's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $804.5 million (and earnings per share of $22.15) by about April 2028, up from $692.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 9.2x today. This future PE is lower than the current PE for the US Specialty Retail industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 3.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.69%, as per the Simply Wall St company report.

AutoNation Future Earnings Per Share Growth

Risks

• The recent improvement in gross profit margins could be temporary, driven by favorable mix in luxury vehicle sales, which may not be sustainable long-term, potentially impacting future gross profit margins.
  
• The high level of interest expense from floorplan debt is a concern, as it was driven by recovering new vehicle inventory levels; continued high expenses could impact net income.
  
• The competitive and constrained market for recruiting skilled technicians could limit growth in After-Sales services, affecting revenue growth in this key profit area.
  
• Tariff uncertainties could impact vehicle pricing and volume if imposed on imports from markets like Mexico or Europe, potentially lowering revenue.
  
• The ongoing shift in market dynamics and increased transparency in vehicle pricing could further pressure AutoNation’s new vehicle gross profits, impacting overall profitability.

Valuation

• The analysts have a consensus price target of $204.167 for AutoNation based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $245.0, and the most bearish reporting a price target of just $175.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $29.9 billion, earnings will come to $804.5 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 10.7%.
• Given the current share price of $162.09, the analyst price target of $204.17 is 20.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.