After watching value investors dive into the market, time to join them.
Almost exactly a month ago I took a look at AutoNation (AN) and at the time said “I think one could wait until summer to pick up shares at and not pay too much more than today.” Shares sat at $15.96 then a today sit at $15.80.
Having just cashed out of our oil (USO) position there are funds laying around for investment. Being hesitant to put more into the retail sector currently, the retail auto sector does look very appealing.
When you have investors like Lampert, Berkshire’s (BRK.A) Buffett, Leucadia (LUK) and Wilbur Ross entering the sector, it pays to monitor them.
Why AutoNation then? Back in March CEO Mike Jackson did an interview and here is the jist of it:
Forecasts this year call for about 15.5 million cars to be sold. Now, interesting tidbit. On CNBC, CEO and Chairman Mike Jackson was speaking of running his (or any) business. In the interview he said he runs his business for “a 1,000 year flood”. He then said that if auto sales dropped to 10 million units, “a depression” he called it, his business would be “cash flow neutral”. That is his basis for decision making.
As a potential investor, this is fantastic news. It simply means that the business will still produce cash even in an almost devastating economic climate. Wonderful…
A positive cash company in the current economic climate makes for tremendous flexibility competitors will not have. Jackson can reduce debt, repurchase shares or expand. In fact, Jackson has reduced share count by 30% the last two years. The repurchases have allowed EPS to stay flat at $1.44 despite the downturn in the auto industry during that time frame.
In the past two years, U.S. auto retail sales have declined 12 percent, Jackson said in early February and he said that economic downturns run in cycles of 30 to 40 months, and the market is currently 24 months into the downswing.
AutoNation’s markets in California and Florida, who account for half of new vehicle sales drove down earnings last year. The two states account for 20 percent of industry-wide new vehicle sales.
When things get better, investors ought to see an amplified increase on the other end due to the repurchases. Hold flat in down times and explode up in good ones, very nice.
The demand for auto related items can be found in recent news from auto parts retailers like AutoZone (AZO) and Advanced Auto Parts (AAP) who both reported increased earnings in the latest quarter. The things is, people have to have cars, the demand will always be there and Jackson has built a business that can capitalize on all demand scenarios.
Trading at 9 times earnings AutoNation will be a winner when demand for auto’s returns. That, it turns out may be sooner than we think. $4 a gallon gas is already changing people behavior and there just may be a rush to trade in that SUV for something much more affordable on gas. Whether it happens now or year from now, AutoNation currently trades at a multiple that assumes it just may never happen, that is wrong..
What Jackson said today on CNBC clinched it for me:
The guy has his business set to profit no mater what happens. Electric cars? Ok. Hybrids? Sure. SUV? Got ’em. People must have a vehicle and Jackson is there to provide whatever they need from whoever produces it. With his scale it come very close to a toll bridge business. He provides people a necessity that they must replenish fairly often at considerable expense…
Disclosure (“none” means no position):Long AN, none
4 replies on “Buying AutoNation (AN)”
As long as Lampert is merely investing in AutoNation it may be an OK investment. If he decides he should run it too, look out.
if you look at the actions of management at autozone, autonation and sears, you’ll see similar thought processes..
cut costs, repurchase shares, take care of the balance sheet
Updated forecast for this year is ~14 million cars to be sold.
3.9 Bil in debt is not good. Go into massive debt to buyback stock?
The consumer is broke. They bought into the fantasy that they were well off because they could get unlimited amounts of credit and house appreciation would take care of their savings. Well that dream has become a nightmare for many. See the consumer hunkering down for years to come.
Cash from operations is falling so this is not prudently managed and I doubt if car sales fall to 10 mil that AN will make any money at this point.
I do believe the ceo does have a good grasp of our energy problem.