After-Sales And Digital Evolution Will Capture US Secular Trends

Key Takeaways

• Record growth in after-sales and expanding used vehicle operations are driving stable, high-margin revenue with continued strength expected from changing industry dynamics.
  
• Investments in digital transformation, finance, and strategic acquisitions are enhancing efficiency, customer reach, and positioning for sustained profit expansion.
  
• Growing competition from digital and direct models, EV adoption, and evolving OEM strategies could erode AutoNation's traditional advantages, pressuring margins and long-term profitability.

Catalysts

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

• AutoNation's robust growth in After-Sales (service, parts, and collision), which delivered record revenue and expanding gross margins, positions the company to benefit from the long-term increase in vehicle age and a growing car parc in the U.S.-this secular shift is likely to underpin resilient, recurring high-margin revenue and support future earnings stability and growth.
  
• The expansion of AutoNation USA stand-alone used vehicle stores and strategic densification in key markets is capitalizing on the industry-wide structural under-supply of new vehicles post-pandemic, which supports used car demand, firm pricing, and higher gross margins-these trends are likely to drive continued revenue growth and sustained margin strength as the company grows national footprint and F&I penetration.
  
• Significant investment and operational emphasis on digital transformation-including enhanced data analytics, omnichannel sales, and improving inventory/pricing management-leverages accelerating consumer preference for online research and purchasing, broadening customer reach and driving higher topline and operating margin efficiency.
  
• Continued growth and performance of AN Finance, the captive finance arm, is boosting customer penetration, product attachment rates, and overall financing profitability, which increases both per-unit gross profit and provides lower volatility annuity-like cash flows, supporting both net income and earnings per share.
  
• Industry consolidation and AutoNation's disciplined capital allocation (including M&A in targeted markets and share repurchases) create scale benefits and cost efficiencies, providing further margin expansion opportunities and positioning AutoNation to leverage secular trends favoring large, diversified retailers in negotiating power, cost structure, and sustained earnings growth.

AutoNation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AutoNation's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 2.9% in 3 years time.
• Analysts expect earnings to reach $871.6 million (and earnings per share of $24.96) by about September 2028, up from $633.8 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 11.2x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 4.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.1%, as per the Simply Wall St company report.

AutoNation Future Earnings Per Share Growth

Risks

• The rise of direct-to-consumer and online-first auto retail models (e.g., Carvana, Tesla, OEM digital channels) could erode AutoNation's traditional dealership advantage, potentially compressing margins and impacting revenue growth over the long term.
  
• Accelerating electric vehicle (EV) adoption is likely to reduce demand for high-margin aftersales and service offerings (which represent nearly half of gross profit), as EVs require less ongoing maintenance than internal combustion vehicles-threatening long-term earnings and margin resilience.
  
• Continued heavy dependence on used car sales profitability, in the context of persistent inventory constraints and increasing competition from digital platforms, heightens the risk of margin compression and earnings volatility, especially as supply challenges ease and pricing normalizes.
  
• The company's slower, more methodical expansion of stand-alone AutoNation USA used vehicle stores-due to prior overzealous growth plans and the need for density-may limit rapid top-line growth and constrain scale advantages relative to faster-scaling digital or omnichannel competitors.
  
• OEMs' potential shift toward agency or subscription-based sales models, as well as over-the-air software updates, could diminish dealership roles in both new vehicle sales and post-sale services, posing a structural risk to AutoNation's revenue streams, bargaining power, and long-term profitability.

Valuation

• The analysts have a consensus price target of $221.909 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 $255.0, and the most bearish reporting a price target of just $200.0.
• 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 $871.6 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 11.1%.
• Given the current share price of $224.99, the analyst price target of $221.91 is 1.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.