AutoNation Has Wind in Its Sails, but for How Long?

Everyone knows the automobile business has made a tremendous comeback that stretches from the manufacturers to the dealers. National dealer giant AutoNation (NYSE: AN  ) has been no exception, with its stock rising more than 300% over a five-year period, without as much as a blip along the way. Recent results show continued strength across all sectors -- new, used, domestic, imports, premiums, etc. Coming out of the financial crisis, AutoNation had the extra tailwind of a historically ancient average vehicle age in the United States. In the recent quarter and the just-ended year, the company blew earnings out of the water with record results and estimate-beating figures. For investors, the question is not whether AutoNation is set to continue its growth run (it is), but whether the stock has room to breathe after its multiyear vertical.

Are investors buying tomorrow or yesterday?
AutoNation's just-ended quarter showed 24% adjusted earnings-per-share growth to an all-time record of $0.83, as well as 8% top-line sales growth. The full year posted a record $2.97 per share in earnings and $17.5 billion in sales -- a 12% bump that featured growth across every segment.

Management sees the good times continuing, especially in the new vehicle arena. CEO Mike Jackson cited expectations for sales of 16 million new units for the current year.

In general, big-ticket items have enjoyed sustained consumer demand even while people remain wary of eating out too often or buying new clothes. This is likely a product of easy credit availability and cyclical timing. For AutoNation, premium vehicle sales are leading the way (largely through the company's growing portfolio of Mercedes-Benz dealers) with income seeing 28% year-over-year growth to $103 million in the last quarter.

So, sure, AutoNation is firing on all cylinders and looks set to continue. A 13.2 times forward earnings ratio doesn't look too rich, either. But how does it compare to peers?

Good price
Look at Group 1 Automotive (NYSE: GPI  )  for comparison. It's a smaller company by market cap, but is essentially in the same business -- it owns and operates 139 dealerships, has 190 franchised locations, and 37 collision centers. For its part, AutoNation owns 263 new vehicle franchises representing more than 30 brands.

Performance-wise, Group 1 is seeing similar results to AutoNation, if a little chunkier (it's easier to post bigger numbers as a smaller company). New vehicle sales were up 17% in the recently ended quarter, and margins appear to be thickening across the board.

Group 1 trades at slightly more than the 11 times forward earnings mark and has an EV/EBITDA of 10.19 times. AutoNation is richer on both marks, with an EV/EBITDA of 12.31 times. Both companies are asset-heavy and hold the typical debt profiles of such businesses. Debt far outweighs cash, but neither seem particularly overleveraged given their attractive growth and the market demand.

AutoNation is the industry giant. It has more analyst coverage and holds a premium valuation. In general, a company with lots of market attention within a hot sector is more efficiently priced than others. That doesn't imply that AutoNation won't continue its upward trajectory, but its smaller, less-followed counterparts may hold the opportunity for more upside as they are more susceptible to mispricing.

All in all, AutoNation is set to continue growing and earning its market premium, but investors shouldn't expect to get the big-time growth that the last five years showed. As Americans update their garages and credit becomes a little tighter, demand will cool a bit. Be aware of the value received for the price paid, and understand that these days of record-breaking numbers will not last indefinitely.

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