AutoNation (AN)

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See all 4 Bulls Reasons Bulls: Reasons To Buy Company will explode when recession ends 100% agree Company will explode when recession ends AutoNation's markets in California and Florida, which 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... read more View or Edit Reason 1 votes 100% agree Strong forecasts, Eddie Lampert's buying 100% agree Strong forecasts, Eddie Lampert's buying Eddie Lampert of Sears Holdings (SHLD) can't seem to buy it fast enough and he currently owns over 35% of the company. Forecasts this year call for about 15.5 million cars to be sold. Now, for an interesting tidbit. On CNBC Wednesday, CEO and Chairman Mike Jackson did an... read more View or Edit Reason 1 votes 100% agree Positing cash flow translates to flexibility during these economic times 100% agree Positing cash flow translates to flexibility during these economic times A positive cash company like AN in the current economic climate makes for tremendous flexibility that competitors will not have. Jackson can reduce debt, repurchase shares or expand. In fact, Jackson has reduced share count by 30% over the last two years. The repurchases have... read more View or Edit Reason 1 votes 100% agree See all Bears Reasons Bears: Reasons To Sell Falling new car sales 0% agree Falling new car sales Vehicles sales have fallen off via credit market challenges, record costs and the poor housing market. S&P expects "underlying fundamental new-vehicle market challenges to remain difficult into 2008." Industry experts are indicating that 2008 could be the worst year for auto sales in over a decade. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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AutoNation, Inc. sells new and used cars through its 331 franchises located primarily in U.S. metropolitan areas of the Sunbelt region (Southeast and Southwest United States). In 2006, the company sold approximately 600,000 vehicles^[1] with the top seven makers (Ford, GM, Daimler Chrys;er, Toyota, Nissan, Honda, and BMW) representing 90% of their business. AutoNation also sells vehicle parts, automotive service and repairs, car financing, and other automotive aftermarket products for its brands.

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.

[edit] Company Overview

[edit] 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 nearly 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.

[edit] Financials

Below is a breakdown of AutoNation’s revenue, gross profit, and operating profit by product category. While 60% of revenue is derived from automobile sales, the margins are low in this category and only 30% of gross profit comes from auto sales. Conversely, 30% of revenue but 60% of gross profit is derived from parts and servicing.

^[4]

[edit] Product Mix Operating/Financial Facts^[5]

The company's product mix includes:

• New vehicles: 369,567 units sold at average price of $30,206/unit (2006)
• Used vehicles: 225,609 units sold at average price of $16,051/unit (2006)
• Financing and insurance: $623 million of revenue booked (2006)
• Parts and Service: highest gross margin contributor at 60%, with 43.9% gross margins on average.

[edit] Other Financial Considerations

Though a generally low margin business, AutoNation generates substantial free cash flow. Nonetheless, the company must service some $1.6 billion in mortgage debt and capital leases in addition to $2.3 billion of "floorplan" financing, which is provided for the company to finance its high price-per-unit automobile inventory. In this sense, the company is notably levered.

[edit] Company Specific Trends/Risks

[edit] Dependence on continued financial viability of auto manufacturers

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 financial viable, AutoNation is at risk of materially adverse after-effects.^[6] 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.

[edit] 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.^[7] 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.

[edit] 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.

[edit] Growth through acquisitions is limited

AN has not been opening new stores, instead it has relied on acquiring existing stores, which, the company stated at the end of 2006, will be difficult to find attractive acquisition prospects. In addition, the company depends heavily on the consent of manufacturers and distributors in order to acquire these stores because AN operates largely through franchise agreements with manufacturers and distributors.^[8] These agreements typically give manufacturers and distributors substantial control over whether AN can acquire or open new stores carrying the same or similar brand name autos, likely due to suppliers desire to avoid being overly concentrated in their retailing customer base (since disproportionate dependence upon AutoNation might give the company excessive bargaining power). Franchise agreements often stipulate that AN may be compelled to close or sell franchises if they underperform financially or do not meet certain capital requirements.^[9]

[edit] Macro Trends Affecting AutoNation

[edit] Rising Oil Prices

[edit] 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.

[edit] 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.^[10]

[edit] 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.^[11][12] 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.

[edit] 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. While CarMax's 337,021 used car sale units was the highest of any company in the United States, it represents just 0.87% of the estimated 43 million units sold yearly in the country.^[13] This compares to AN's estimated 0.59% used-car market share. However, AutoNation's new vehicle market share is a higher 2.2%, based on its 369,567 units and the approximate 17 million new vehicle units sold nationwide.

[edit] Market Share for Auto Parts & Services

^[15]

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), and CSK Auto (CAO). Below is a comparison of operating metrics, combining DIY and DIFM sales and market share figures.^[16]

[edit] Footnotes

1. ↑ AN Annual Report 2006, pg 6
2. ↑ AN 2006 Annual Report, “Reported Operating Data,” pg 23
3. ↑ AN 2006 Annual Report, “Reported Operating Data,” pg 23
4. ↑ AN 2006 Annual Report, “Reported Operating Data,” pg 23
5. ↑ AN 2006 Annual Report, “Reported Operating Data,” pg 23
6. ↑ AN 2006 Annual Report, "Risk Factors," pg 7
7. ↑ CSK Annual Report 2006, pg 9
8. ↑ AN Annual Report 2006, pg 28
9. ↑ AN 2006 Annual Report, "Risk Factors," pg 7
10. ↑ Associated Press article, "Subprime crisis could spread to auto loans," November 26, 2007
11. ↑ Dealership statistics from National Automotive Dealers Association, Manheim Auctions, Report 2006
12. ↑ Unit Statistics from CNW Marketing/Research, New vehicle volume, Automotive News 2005
13. ↑ CNW Marketing/Research, New vehicle volume, Automotive News 2005
14. ↑ Market Share calculated as Units Sold divided by total estimated units sold nationwide as provided by CNW Marketing/Research, New vehicle volume, Automotive News 2005
15. ↑ All operating statistics compiled from KMX and AN Annual Reports
16. ↑ Based on 2006 Automotive Aftermarket Industry Association (AAIA) Report
17. ↑ Market Share calculated as Company Sales/Total Industry Segment Sales nationwide as provided by 2006 AAIA Report