AutoNation (NYSE: AN), the largest automotive dealer in the United States, went on a tear back in July leading up to its Q2 earnings. And after releasing earnings on July 23, AutoNation shares added another 15% in the following three trading sessions.
Why am I telling you this?
Because AutoNation is slated to release its Q3 earnings on Wednesday; I don’t expect another 15% post-earnings surge, but I could see a smaller increase coming to fruition.
And even if AutoNation doesn’t get a post-earnings boost, there is a lot to like about its long-term outlook.
Expanding into Used Car Market
On its Q2 earnings call, AutoNation announced plans to build at least 20 more AutoNation USA stores over the next three years – a large increase over its current five stores. For those of you that aren’t aware, these stores only sell used vehicles.
The used car market was massive even before the onset of the pandemic, with 40 million transactions taking place in 2019. Now, the market is even hotter as automakers were forced to shut down earlier this year, leading to a decrease in new vehicle inventory.
The numbers bear this out; in September, there was a 6.7% increase in seasonally adjusted prices of used vehicles – the largest since February 1969. That increase came on the heels of a 5.4% gain in August and 2.3% jump in July.
Will the Used Car Market Stay This Hot?
Now, it’s important to reiterate that AutoNation is building its 20 stores over the next three years. It would be nice if AutoNation could cash in on the elevated 2020 used car demand as much as possible, but that’s not realistic.
That said, there was a shift from new to used vehicles even before the pandemic. The average lifespan of a car was 10 years in 2007. By 2019, it had increased to 11.8 years.
So, no, I don’t see the used car market staying this hot, but it should continue to strengthen long-term.
Used Car Business is Cost-Effective
On the Q2 earnings call, CEO Mike Jackson said, “I have a new vehicle business, which is huge, on which I'm taking trades very cost-effectively, then I have a big pre-owned business that I'm taking trades very cost-effectively. We're building our We'll Buy Your Car business. We're going to buy directly from consumers another 3,500 in July and then you have the auction component as the icing on the cake.”
Some used car dealers largely rely on auctions to get inventory, but AutoNation’s new car business also allows it to accept trades – which can be very cost-effective. This diversification is key with it getting tougher to get inventory at a good price.
AutoNation is No Online Slouch
No one is going to mistake AutoNation for Carvana (NYSE: CVNA), which has made the used car business sexier than anyone would have imagined 10 years ago.
But at the same time, AutoNation’s online operations are no joke; in Q2, around 45% of AutoNation’s vehicle sales were largely handled online. Jackson understands how important an online presence is in this day and age, noting, “Our AutoNation Express online selling tools enable customers to buy and sell vehicles online and our store-to-door delivery option allow customers to completely take delivery at home.”
The Price is Right
AutoNation isn’t going to match Carvana’s revenue growth, projected at 30-40%+ over the next 3+ years.
But as much as I like Carvana, you’re paying a pretty penny for its shares.
AutoNation can’t match Carvana’s growth projections, but it does trade at just 10.7x its projected 2021 earnings.
The Final Word
AutoNation is a company that can provide a combination of moderate growth and multiple expansion.
I don’t expect any major surprises in the Q3 earnings report – on the upside or downside – but you should consider getting in before the strong long-term value becomes apparent to the rest of the market.
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