Acquisitions And Repurchases Will Reshape Operations And Aftersales Service

Key Takeaways

• AutoNation's strategic acquisitions and share repurchases enhance EPS and shareholder value by expanding operations and reducing share count.
  
• Growth in vehicle sales, after-sales services, and AN Finance's profitability supports revenue growth and improved net margins.
  
• Tariffs, competitive pressures, and economic factors could strain affordability and demand, impact margins, and hinder AutoNation's revenue and loan origination growth.

Catalysts

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

• AutoNation's capital deployment strategy included accretive acquisitions and share repurchases, which signify an opportunity for improved EPS and shareholder value through reduced share count and expanded operations. This is likely to enhance earnings.
  
• Strong growth in new vehicle sales, with a 7% increase in same-store unit sales and strategic acquisitions expanding market presence, points to potential revenue growth as AutoNation leverages increased market share and operational synergies.
  
• Continued expansion in after-sales services, achieving significant profit margins with a 140 basis point increase, suggests improvements in net margins due to higher technician efficiency and increased parts and service revenue.
  
• AN Finance's improved profitability ahead of projections, driven by increased originations and reduced credit risk, indicates a potential for higher net income through increased financing income and better management of delinquencies.
  
• Proactive inventory management and increased used vehicle inventory position AutoNation to capitalize on anticipated demand shifts, likely to bolster revenues and margins by optimizing pricing and sales volumes in a potentially tariff-impacted market.

AutoNation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AutoNation's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 2.8% in 3 years time.
• Analysts expect earnings to reach $838.2 million (and earnings per share of $23.44) by about May 2028, up from $677.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 6.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.81%, as per the Simply Wall St company report.

AutoNation Future Earnings Per Share Growth

Risks

• The anticipated tariffs may cause a pull-forward in vehicle purchases, potentially leading to lower future demand and impacting revenue growth.
  
• Tariff impacts on new vehicle pricing could strain consumer affordability and demand, possibly affecting future revenues if not managed effectively by OEMs and dealers.
  
• Competitive pressure from OEMs seeking to maintain market share might limit AutoNation's ability to pass tariff-induced costs onto customers, impacting net margins.
  
• Difficulty in acquiring new vehicle inventory due to supply chain disruptions and tariffs might reduce sales volume and revenue in affected vehicle segments.
  
• Higher interest rates and inflation could dampen consumer loan affordability, negatively affecting AutoNation Finance's loan origination growth and thereby impacting earnings.

Valuation

• The analysts have a consensus price target of $200.923 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 $240.0, 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 $29.7 billion, earnings will come to $838.2 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 10.8%.
• Given the current share price of $176.48, the analyst price target of $200.92 is 12.2% 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.