The Best Auto Dealer Ever Needs To Be In Your Portfolio

AutoNation remains the premier seller of cars in a great environment for car sales.

The first signs of either trouble or recovery in the economy are frequently signaled by the auto industry.  You can often tell how good things are by the number of auto commercials you see on television.  During the financial crisis, they all but vanished.  However, when things picked up, they were everywhere.

auto-dealer

The auto industry has seen robust sales for several years now.  Consumer behavior is such that when times are tough, people will hold onto their clunkers and try to patch up their minor repairs.  Wealthier people hold on to their cars rather than buy or lease a new one.

As things begin to improve, the wealthier set trade in their cars for new ones.  Those who were just hanging on to their beat-up vehicles finally throw in the towel, and used car sales pick up.

Rather than own an individual manufacturer, whose popularity can move with the times, I have always suggested investors look at the multiline dealers, of which AutoNation (NYSE:AN) consistently comes out on top in my analysis.  That hasn’t changed.

AutoNation plays very broadly, offering 33 brands of autos in its 228 stores. They offer new and used domestic and import cars, regular vehicles, and luxury cars.

It doesn’t stop at car sales.  The secondary lines of business offer fantastic margins.  These are things like repair and maintenance, wholesale parts and the (super-lucrative) collision business.  Finance and insurance is how they pad their car prices, along with extended warranties and service contracts.  Things like tire and wheel protection that get added for several hundred dollars often result in almost pure profit.

For the earnings report just released, AutoNation grew EPS another 20% to 90 cnets, beating estimates by 10 cents.  Net income was up 15%, operating income was up 10.8%, and these came on revenue increases of 9.8%.  Same store revenues increased 8.9% — the kind of high-single-digit increase most retailers can only dream about.

All the secondary lines saw healthy revenue increases, from parts and service increases of 9.7% to F&I increases of 12.3%.  Domestic brands are doing better than imports, with the former logging an 11.4% increase in revenues and 19.5% increase in operating income, while the latter increased 5.4% on revenues and 6.1% on operating income.  But it was the premium luxury segment that won the day with a 14% revenue increase and 13.2% operating income increase.

AutoNatio is, to coin a phrase, firing on all cylinders.

Amazingly, despite this growth and the 7% jump in the stock after the earnings release, AutoNation remains a fairly valued growth stock.  The stock trades at $56.  On FY14 earnings of $3.45 per share, it trades at only 16x estimates, which matches analyst long-term estimates.

Considering that most growth stocks trade well above their growth rate on a PE basis, the idea that you can pick up a 16% earnings grower for 16x earnings is something to act on.

Lawrence Meyers does not own shares of AN.

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Published by Wyatt Investment Research at