We recently compiled a list of the 7 Best Auto and Truck Dealership Stocks to Buy. In this article, we are going to take a look at AutoNation, Inc. (NYSE:AN) stands against the other auto and truck dealership stocks.
US Car and Truck Dealership Market
The auto dealership market is one of the key segments of the greater automotive industry. According to a report by Verified Market Research, the auto dealership industry was valued at $257.30 billion in 2023. The market is forecasted to grow at a compound annual growth rate of 4% to reach $338.6 billion by 2030.
The auto dealership market is a consumer-centric industry, which revolves around customer confidence, inflation rates, interest rates, and the overall regulatory environment. According to a press release by Reuters on July 26, the US car market is facing headwinds due to weak prices, high inventories, and difficulties in logging profits.
The slowed market environment has hit shares of major auto manufacturers and car dealerships nationwide. On top of the macro environment challenges, the market was hit by cyber attacks in June 2024. On June 20, CNN reported that the US and Canadian dealership market stood still due to a cyber attack incident at a data provider called CDK Global. CDK Global data is used by more than 15,000 auto dealers across all major countries. While not all auto dealers use CDK to process orders, those that did faced slower sales growth during the quarter.
As per Reuters, the overall new vehicle sales throughout the US in June 2024 stood at 1.32 million units, representing a seasonally adjusted annualized rate of 15.29 million units during the year. Moreover, affordability also remains one of the key concerns for the market, due to which inventories are not expected to advance as strongly as they did over the past 12 months.
Looking ahead, according to the latest Cox Automotive Dealership report on June 10, the Cox Automotive Dealer Sentiment Index (CADSI) remained stable from the first quarter to the second quarter of 2024. The current market index score for Q2 is 42, which suggests that US auto dealers perceive the market to be weak. For context, the score was 45 a year ago and below the threshold of 50. Moreover, the current market expectation shows a decline in market expectations for the next three months, as the market outlook has dropped from a score of 51 in Q1 to 44 in Q2. The downward trend is attributed to the weaker tax refund season and the ongoing political instability due to elections. To read more about the automotive industry you can look at the 7 Best Small Cap Automotive Stocks to Buy.
Our Methodology
To compile our list of the 7 best auto and truck dealership stocks to buy, we used the Finviz stock screener. We selected Auto & Truck Dealership industry to get a consolidated list of stocks. Next, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An AutoNation-branded dealership, showcasing the wide variety of new and used vehicles on offer.
AutoNation, Inc. (NYSE:AN)
Number of Hedge Fund Holders: 37
AutoNation, Inc. (NYSE:AN) through its subsidiaries is one of the largest automotive retailers in the United States. The company operates through three main business segments, including Domestic, Imports, and Premium Luxury services. It generates revenue by selling new and used vehicles, parts and services, and automotive finance and insurance services to its customers. As per its 2023 annual report, the company owned and operated 349 new vehicle franchises from 252 stores in the United States. The company also owned 53 branded collision centres, 19 used vehicle stores, and 3 parts distribution centres.
The competitive edge of the company lies in its extensive network of over 300 franchises and stores that are situated in major metropolitan cities of the country. The strategic location of its stores allows it to access a vast customer base. Moreover, the company has been focusing on its digital capabilities to enhance customer experience by enabling online vehicle browsing and purchasing.
The second quarter earnings were impacted by the CDK outage, however, the company was still able to maintain its margins and profitability. According to management, the outage impacted $1.55 in earnings per share during the quarter. Total revenue for the quarter amounted to $6.48 billion, a 6% decline year-over-year, however identical to the first quarter results.
Gross profits were also impacted by the outage and were recorded to be $1.2 billion, an 18% decrease year-over-year. On the bright side, the company was able to maintain stable margins, with gross margins of 48% increasing 60 base points subsequently, due to improved service efficiency. Moreover, the sales of imported brands witnessed a 6% growth, demonstrating strong brand value despite tough market conditions. AutoNation, Inc. (NYSE:AN) achieved another notable milestone of bringing back its new vehicle inventory to pre-COVID levels and generated operating income of $319 million in the quarter.
Should you invest in AutoNation, Inc. (NYSE:AN)? Here’s the conclusion:
There is no doubt that the company faced some headwinds due to the CDK outage, however, what’s notable is management’s ability to maintain margins amidst challenging market situations. Moreover, if you look at the company’s 10-year record, you will see that it has been able to grow its revenue by 4% and net income by 7%. AN also presents an attractive entry point for investors as it is trading at 9 times its forward earnings, which is a 37% discount to its sector. Wall Street is also bullish on the stock. 14 analysts have a consensus Buy rating on the stock, with their median price target of $190 presenting a 14% upside from current levels.
AutoNation, Inc. (NYSE:AN) was held by 37 hedge funds in Q1 2024, with total stakes worth $685.054 million.
Bonhoeffer Capital Management stated the following regarding AutoNation, Inc. (NYSE:AN) in its first quarter 2024 investor letter:
What is interesting about the car dealer group of firms is that the EPS growth has been reasonably close despite how different the firm’s operating models were. AutoNation, Inc. (NYSE:AN), with few acquisitions and a lot of repurchases, had net income growth close to total auto US dealer sales growth of 3% compared to Lithia which was very acquisitive and issued more shares than it repurchased. As can be seen by stock price returns, the market discounted AutoNation’s approach of fewer acquisitions and more buybacks versus the more common acquisition and buyback approach.
Overall AN ranks 5th on our list of the best auto and truck dealership stocks to buy. You can visit 7 Best Auto and Truck Dealership Stocks to see the other auto and truck dealership stocks that are on hedge funds’ radar. While we acknowledge the potential of AN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.