AutoNation’s Valuation Does Not Reflect Its Record Performance

AutoNation continues to grow and implement strategies for the future, so why is it undervalued?

May 16, 2014 at 11:42AM

AutoNation (NYSE:AN) has benefited from the pent-up demand in the car market and has reported outstanding results in recent years. The auto dealer recently reported record results and sees more rewards for shareholders in its future. The company also just announced a partnership with Avis Budget Group that should serve it well going forward. Despite its sold operating performance, AutoNation remains relatively undervalued in comparison with the market and its industry. Its low valuation is shared by some of its competitors, including Group 1 Automotive (NYSE:GPI) and Penske Automotive Group (NYSE:PAG).

AutoNation continues to grow
AutoNation sold 25,669 new vehicles in April of 2014, which was its best April since 2006 and represented an increase of 14% over April of 2013 . Factoring out its stores opened since April 2013, AutoNation sold 24,955 vehicles, which still represented a rise of 11%. 

AutoNation's April numbers also showed that the company is benefiting from the bifurcated economy with increased spending on luxury and premium vehicles. While its domestic vehicle sales increased 4% from April 2013, its sales of imported vehicles increased 18% to 12,857. Its sales of premium luxury cars rose a whopping 22% from April 2013 to 4,952. These numbers show that the car market is heating up, and AutoNation is positioned to benefit from increased spending on luxury and premium vehicles made in the U.S. and other countries as well.

Record results and happy shareholders
AutoNation is just coming off a record first quarter in which it reported EPS of $0.79 on revenue of $4.4 billion . Those numbers represent increases of 16% and 7%, respectively, over the prior year's quarter. Mike Jackson, AutoNation's Chairman and CEO, said that he expects U.S. new vehicle sales to increase again by about 3% to 5% in 2014.

The company also returns capital to its shareholders and repurchased 2.4 million shares of its common stock in the first quarter of 2014. Its repurchases in the quarter amounted to $115.7 million, and the company has $400 million remaining in its repurchase program. Therefore, AutoNation shareholders should expect the company to keep returning capital and realize further bumps in EPS in conjunction with solid operating performance.

Expanding in the used-car market
The supply in the used-car market has been constrained in recent years as the government implemented its "cash for clunkers" program and consumers cut back their spending on new vehicles during the recession. AutoNation's recent deal with Avis Budget Group should help it increase its share of the used-car market and further diversify its operations. In the event of another economic downturn, AutoNation's used-car business could see upside if its new car business saw declines. The program between the two companies allows consumers to test-drive vehicles before buying them free-of-charge. It helps Avis update its rental car arsenal and allows AutoNation another avenue to sell used cars in a tight market.

Great performance but still valued low
AutoNation is undervalued in comparison with its industry and the S&P 500. On an earnings basis, AutoNation trades below other auto dealerships with a price-to-earnings multiple of 17.2 versus 18.6 for the industry. Moreover , AutoNation's P/E of 17.2 is lower than the S&P 500's P/E, which is 18. So AutoNation is actually a bargain in comparison with the market and its industry even with record results. Interestingly, Group 1 Automotive and Penske Automotive Group trade at discounts to the industry and the market as well. Group 1 and Penske trade at P/E multiples of 17 and 16.9, respectively, which shows that there are some other bargains in the automotive dealership sector as well.

On a forward looking basis, Group 1 is a cheap stock with a five year PEG ratio of 0.7. A PEG ratio under one signifies undervaluation and Group 1 certainly fits that bill. Penske seems to be slightly overvalued with a PEG ratio of 1.08 but is not in bubble territory by no means. On a relative basis, however, Group 1 seems to be the better buy at this point. For AutoNation, its PEG ratio is under 1 like Group 1's at 0.97. So, AutoNation seems to be a cheap stock on a five year forward looking basis in addition to Group 1 with Penske slightly overpriced.

Hop in the driver's seat with AutoNation
AutoNation presents itself as a bargain and so do some of its peers in the automotive dealer space. The company has been reporting excellent earnings and revenue while expanding its business and diversifying it. AutoNation's valuation and operating performance are a compelling case for considering an investment in a superb auto-dealership company.

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Andrew Sebastian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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