There are many aspects of AutoNation (NYSE:AN) that are intriguing to investors. For instance, many would love to capitalize on the surge in new vehicles selling across the U.S. market, but those investors often want to avoid the capital-intensive businesses of most manufacturers, such as Ford and General Motors.
That's what makes AutoNation intriguing, because not only doesn't it manufacture cars itself, but it's a dealership group that doesn't rely on any single brand, manufacturer, or vehicle segment to generate sales. Furthermore, dealership groups don't have retiree expenses or unions to work with. Because of those factors, well-run dealership groups are arguably the sweet spot in the entire automotive industry. Here are three more things to like about AutoNation as a potential investment.
It's well balanced
When scouring the automotive industry for market-beating investments, one thing to look for is balance. While Ford and General Motors thrive when sales of full-size trucks and SUVs are booming, the Detroit automakers were brought to their knees during the recession when sales of larger vehicles plummeted. Fortunately for investors, AutoNation has a very well-balanced business.
Most investors think new-vehicle sales drive dealership groups' financial success. While new-vehicle sales indeed do generate a majority of AutoNation's revenue, you can see that gross profits are dominated by the parts and service business. Not only is does this make it well balanced, it's also great news for investors because the parts and service business is less volatile during a market downturn and helps mitigate the company's exposure to the automotive industry's cyclical risks.
It's seemingly solved the problem of third-party sales
AutoNation is also a very forward-thinking dealership group. One of the company's more pesky problems in recent history was its relationship with third-party car-shopping sites, such as TrueCar (NASDAQ:TRUE). As consumers continue to have a fairly strong distrust of dealership salespeople, companies like TrueCar that offer pricing transparency have inserted themselves as middlemen between consumers and dealerships. This makes the sales leads from TrueCar less profitable for groups like AutoNation, as the latter pays TrueCar a fee for each completed sales lead.
So, what's a dealership group to do? AutoNation apparently plans to fight fire with fire.
AutoNation invested about $200 million into technology and branding to improve its own website and enable consumers to use its "AutoNation Express" transaction tools to purchase vehicles online. It's a strategy that is beginning to pay off. Eighteen months ago, AutoNation generated roughly 20% of its vehicle sales from third-party sites, while its own website generated about 10% of the company's sales. Now, that momentum has flip-flopped: AutoNation's website is driving about 20% of its sales while third-party websites only generate about 9% of sales.
It's a great move, because for each sales lead that TrueCar delivered and AutoNation completed, the latter paid TrueCar roughly $300 per sale -- and that's cash that would hypothetically flow straight to AutoNation's bottom line as it completes its own online sales leads rather than taking them from third-party sites.
It's on an acquisition spree
While investors will always pay attention to AutoNation's same-store sales growth, it's also good to see that the company is buying up dealerships. In fact, it is making 2015 its biggest year for acquisitions since 1999. Adding up all of its 2015 acquisitions, assuming all will be completed, the new dealer stores will represent an estimated $929 million in added annual revenue -- a big jump from its five store purchases last year that added about $450 million in annual revenue.
There's even more to this than meets the eye for investors. While the top-line growth these acquisitions will fuel is great, many of the stores will also help expand the dealership group's presence in the Southeast. More specifically, AutoNation will grow its dealership count in Georgia by 11 stores, and that will make the state one of the company's most important markets.
It's a big deal because as of the end of 2014, AutoNation generated about 66% of total annual revenue from operations in three markets: Florida, Texas, and California. The other 34% of total 2014 revenue was generated through operations in 12 other states. AutoNation's dependence on its top three markets should be lessened with the increased presence in Georgia, which will likely become the company's fourth most important market in terms of total revenue.
Ultimately, AutoNation is a balanced and well-run business that is improving its online presence and aggressively growing through acquisitions. While its presence in the cyclical automotive industry remains a risk, it's worth a look for investors trying to capitalize on surging U.S. new-vehicle sales.
Daniel Miller owns shares of Ford, General Motors, and TrueCar. The Motley Fool recommends Ford, General Motors, and TrueCar. 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.