AutoNation Is a Solid Investment

AutoNation (AN 0.28%) and its peers in the car market, including Group 1 Automotive (GPI 1.09%) and Penske Automotive Group (PAG 0.73%), have benefited in recent years from pent-up demand brought on by the financial crisis. In addition, they've reaped the rewards from the government's previous "cash for clunkers" program, which reduced inventory in the used car market and forced buyers into new or later-model used cars. Even with its recent success, AutoNation trades at a fair valuation, and so do Group 1 and Penske.

Best sales since before the recession
AutoNation's sales increased 15% in May to 30,275 new vehicles from May 2013. The recent May sales were the best numbers for AutoNation since May 2006. On a same-store basis, sales also increased by 12% to 29,471 new vehicles in May compared to May 2013.

In the month of April, AutoNation's sales figures were also impressive. The auto dealer sold 25,669 new vehicles in April, an increase of 14% over April 2013 and its best April since 2006. Similar to May, its same-store sales in April were also impressive, as they increased by 11% to 24,955 vehicles.

In its most recent quarter, AutoNation reported record results. The company earned $0.79 per share and generated revenue of $4.4 billion. The earnings-per-share and revenue values represented increases of 16% and 7%, respectively, versus 2013's first quarter. Moreover, AutoNation's Chairman and CEO Mike Jackson stated that AutoNation should realize further increases in sales of about 3% to 5% in 2014.

AutoNation and the industry fairly valued
As previously mentioned, AutoNation and its peers trade at decent valuations. The following table summarizes the current valuations of AutoNation, Group 1, and Penske.

Data Source: Yahoo! Finance & Morningstar

The S&P 500 index currently trades at a P/E of 18, so all the auto dealers are trading at around the valuation of the market on a P/E basis. Their forward valuations, however, look inexpensive, with AutoNation the highest at a respectable 15.6. AutoNation looks fairly valued looking out five years with a five-year PEG of 1.1. A five-year PEG (price/earnings to growth) of around 1 is considered fairly valued, so AutoNation fits that bill, and Group 1 looks even more attractive on a PEG basis with a PEG of 0.7.

AutoNation, Group 1, and Penske do trade at premiums to the market on a P/CF (price/cash flow) basis, however. The S&P 500 currently trades at a P/CF of 11.1, so Penske looks the most attractive on a cash flow basis with a P/CF of 13.6. Nonetheless, none of the companies are absurdly valued, and all of them offer decent growth propositions with the continued uptrend in auto sales.

Shareholder-friendly policies
AutoNation returns capital to its shareholders at a significant clip, repurchasing 2.4 million shares of its common stock in the first quarter of 2014 alone. The stock repurchases in the quarter were valued at $115.7 million, and AutoNation still has $400 million remaining to repurchase shares. As a result, AutoNation's shareholders will benefit further from the company's capital-return program as the share count decreases with increases in sales and earnings.

Foolish takeaway
AutoNation's valuation ratios explored in this article do not necessarily lead investors to conclude that AutoNation is undervalued by a wide margin. But they do lead investors to consider AutoNation as a fairly valued company with policies that benefit its shareholders and sales on the uptick. Surprisingly, its competitors in the auto-dealer industry are also decently valued. Therefore, investing in the auto-dealer sector in general would not be a bad idea--but I believe AutoNation offers the best proposition for investors looking for a company that rewards its shareholders and is growing significantly.