Favorable Demand Environment Drives Auto Nation
If you have been wondering if the used car market is flagging AutoNation’s (NYSE: AN) Q2 results should put those fears to rest. The company not only produced significant growth over last year but growth well above the analyst consensus and says the demand environment is favorable. In our view, they couldn't be more right. Used car dealers across the industry are struggling to find supply to meet the demand and that is driving a sustained increase in prices for used cars, revenue, and earnings for the used car dealers.
Mike Jackson, AutoNation's Chief Executive Officer, stated, "Demand continues to outpace supply for new vehicles. We expect this to continue into 2022 due to consumers' preference for personal transportation coupled with lower interest rates."
AutoNation Set High Bar For Used Car Industry
AutoNation had a stellar second quarter and one that sets a high bar for the used car industry. The company's $6.98 billion in consolidated revenue is up 54.1% from last year and that is on top of a very solid comp. The revenue is up 30% over the last two years and beat the consensus by 1500 basis points on strength in both new vehicle sales and used car sales. The company's new car sales are up 42% from last year and 12% from 2 years ago while used car sales are up 37% from last year and 32% over the past two years.
On a same-store basis, gross profit increased by 68% year-over-year and 52% compared to 2019. This was driven in part by higher demand and also in part by higher prices that are being driven by higher demand. The combination of rising sale prices for used cars and revenue leverage drove strong gains on the bottom line as well. The profit per vehicle on new vehicles increased 90% from the prior year while profit per vehicle on the higher-margin used cars was up 24%. Both GAAP and non-GAAP EPS came in at $4.83 and beat the consensus by more than $2.
The earnings strength, as great as it was, was also driven by share repurchases. The company bought about 9% of the shares outstanding during the quarter and plans to continue buying shares in the current quarter. The board of directors authorized an additional $1 billion in repurchases which is about 12% of the market cap. That should provide a floor for share prices if not a tailwind to push them higher.
AutoNation Is A Deep Value
AutoNation is a deep value trading around 10X its consensus earnings estimate. The consensus is also too low which makes the value even better. As of mid-year, the company has already earned 73% of the annual consensus EPS estimate and is on track to soundly beat It. This compares to a roughly 21.5 X valuation for the broad S&P 500 and an 18X valuation for competitor CarMax.
The Technical Outlook: AutoNation Is Ready To Set New Highs
The price action IN AutoNation slipped a little bit in early trading but appears to have regained its footing. The stock is forming a bullish-looking candle confirming support at the short-term moving average and implies a continuation of the near-term trend. There is a chance of resistance at the $107 level but we don't think it will last long. Based on the results, the outlook, and the technical indications it looks like the stock is ready to move up and set a new all-time high. Once the stock sets a new all-time high we see it moving up to the $128 level if not higher.
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