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WIKI ANALYSIS
AutoNation, Inc. (NYSE:AN) is the largest automotive retailer in the United States as of December 31, 2009.[1] The company sells new and used cars through its 246 franchises located primarily in U.S. metropolitan areas of the Sunbelt region (Southeast and Southwest United States). The company sells 33 different brands of new cars, including Toyota Motor (TM), Ford Motor Company (F), Honda Motor Company (HMC), General Motors (GMGMQ), Mercedes, BMW, and Nissan Motor (NSANY) made up 96% of its new cars sales.[1]
The company markets its stores under various local brand names, and due to its size relative to a fragmented competitor base (aside from competitor CARMAX (KMX)), AutoNation can leverage its size and scale to achieve cost efficiencies across its stores. However, the company operates in a mature industry and has experienced limited ability to grow via acquisitions, its primary method of growth. Furthermore, the company is negatively affected by rising oil prices as consumers drive less frequently and demand fewer new and used cars and fewer parts for their existing cars.
Company Overview
History
AutoNation was founded in 1996 by billionaire entrepreneur Wayne Huizenga, who also founded Blockbuster (BBI) and Waste Management (WMI). The company initially marketed itself under the AutoNation USA brand, but switched to the local branding strategy around 1999, after years of intense and unsuccessful rivalry with CARMAX (KMX). The company approached the brink of bankruptcy during its race with CarMax to open stores, but survived and began to prosper as competition slowed down and strategies diverged slightly.
Financials
For the year 2009, new vehicle sales accounted for 53% of its total revenues, while used vehicle sales accounted for 23%.[1] Autonation sold parts and services, which accounted for 20% of total revenue, while financing and insurance products accounted for the remaining 3%.
For 2009, AutoNation earned a total revenue of $10.76 billion, enabling it to earn a net income of $198 million. Compared to 2008, AutoNation's total revenues declined, due largely to the tougher economic climate in 2009. This is evidenced by the fact that in 2009, only 10.4 million new cars were sold in the entire United States compared to 13.2 million in 2008.[2]
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Company Specific Trends/Risks
Dependence on continued financial viability of Auto Makers
Vehicles made by General Motors (GM) and Ford Motor Company (F) constitute 33% of the AN's sales, and as American automakers struggle to remain competitive and financially viable, AutoNation is at risk of materially adverse after-effects.[3] Each of the "Big Three" (Ford, GM, and Daimler Chrysler) face substantial on and off-balance sheet liabilities, significant losses, and stiff competition from more cost-effective and successful competitors abroad, like Toyota Motor (TM) and Honda Motor Company (HMC). If any of these companies enter bankruptcy, raises prices, cut back production, or otherwise shift their business strategy, AN may experience store closings, drops in revenue at locations carrying GM and Ford brands, or otherwise strained margins or contracted business.
Highly fragmented and very mature market
The automotive retail industry is highly competitive, very fragmented, and mature. Nonetheless, the market (and aftermarket) for cars, parts, and service has steadily, albeit modestly, increasing demand. In the U.S., increases in the number and age of vehicles, number of miles driven annually, licensed drivers, and total number of light trucks (which generally require greater upkeep) provide for a relatively steady and growing automotive market.[4] The American market, however, is mature and unlikely to experience significantly higher rates of growth. Also, increases in the quality of cars may offset the need for secondary purchases of repair equipment and parts, which constitute the majority of AN gross profits.
Economies of Scale and Competitive Advantages
That the automotive retail market is so fragmented is both a challenge and an opportunity for AutoNation. The fragmentation makes for intense price competition for all dealers. However, because of AutoNation's relatively large size, store network, ability to command volume discounts, and ability to market its local brands in unison, the company enjoys something of a cost advantage over competitors. Furthermore, though barriers to entry are small, AN's scale is not easily duplicated in the industry; therefore, competitors may have a difficult time competing with the company's prices.
Macro Trends Affecting AutoNation
Rising Oil Prices
Travel & Hurricanes in the South
Increased travel and natural disasters like hurricanes can dramatically affect pricing for the company. When Americans travel more, rental companies like Hertz Global Holdings (HTZ) and Avis Budget Group (CAR) demand greater numbers of wholesale used-cars from AutoNation, and bidding intensifies. Similarly, hurricanes, such as those of the magnitude of Katrina and Rita, destroy large quantities of vehicles in the South/Sun Belt, a key market for the company. When replacements are sought in mass, demand drives car prices upward. Positive hurricane pricing is somewhat offset by the fact that the company operates a number of stores in storm-prone regions, placing them at risk of damage and necessitating pricey insurance coverage.
Subprime Delinquencies on Auto Loans
As many auto buyers finance their purchases with loans, there exists a risk of spillover from the subprime lending crisis into the auto-loan business. As homeowners/car buyers struggle to pay both their mortgages and auto-loans, the company may assume losses due to loan delinquencies as well as hampered demand for auto loans going forward.[5]
Competition and Market Share
The domestic industry for automotive new vehicle retail is fragmented and includes approximately 21,500 franchised dealerships and 17 million units sold annually. Similarly, the used vehicle retail industry includes some 45,000 independent used car dealerships and 45 million units sold annually.[6][7] Most are independently owned and operated, mom-and-pop type operations, as opposed to the AutoNation and CARMAX (KMX) roll-up, large-scale, parent company model.
Market Share for Used/New Autos
AutoNation's largest used-car competitor is CARMAX (KMX), which operates 77 retail superstores in 36 metropolitan markets and focuses on the highly fragmented used car market instead of the new vehicle market.
Market Share for Auto Parts & Services
In the parts market, the company competes with do-it-yourself and do-it-for-me outlets, including AutoZone (AZO), Advance Auto Parts (AAP), O'Reilly Automotive (ORLY), Pep Boys-Manny, Moe & Jack (PBY), and CSK Auto (CAO).
Footnotes
- ↑ 1.0 1.1 1.2 AN 10-K 2009 Item 1 Pg. 1
- ↑ AN 10-K 2009 Item 7 Pg. 21
- ↑ A 2006 Annual Report, "Risk Factors," pg 7
- ↑ CSK Annual Report 2006, pg 9
- ↑ Associated Press article, "Subprime crisis could spread to auto loans," November 26, 2007
- ↑ Dealership statistics from National Automotive Dealers Association, Manheim Auctions, Report 2006
- ↑ Unit Statistics from CNW Marketing/Research, New vehicle volume, Automotive News 2005
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