AutoNation's Shares Appealing Due to Tariff Resilience
Breaking Down AutoNation, Inc's Q1 Performance and Tariff Impact
In a Nutshell: AutoNation, Inc. (AN) reported a solid Q1 performance, with shares dipping 2.5% in early trading. Despite Trump's tariff initiatives affecting the auto industry, AN managed to post impressive results, and the analyst remains bullish on the stock.
Q1 Financials: AN earned $4.68, surpassing estimates by $0.30, as revenue grew by 4%. Gross profit increased 2% to $1.22 billion due to margin expansion in used vehicles and maintenance work. However, operating income dropped 4% to $335 million due to faster SG&A growth, a necessary investment in technology and technician workforce updates.
Segment Analysis:- New vehicles: Same-store sales grew by 10% due to a 7% increase in volumes. Although gross profit was down 11% due to compression in margins, inventory decreased by 14%.- Used vehicles: Gross profit expanded by 12%, reflecting stronger sales at the low-end and margin opportunities from tariffs.- Financial services: Gross profit per unit increased by 3%, contributing to a $18 million rise in total gross profit.- Maintenance: Despite a 1% decline in revenue, gross profit grew 2% thanks to ongoing technician productivity gains.
Tariff Impact: AN has several natural hedges within its diverse business model, making it more resilient to auto tariffs. The analyst believes the impact will be limited toaround 2%, with used car prices rising 5-15% as a temporary gross margin opportunity. However, widespread tariffs increase recession risks, which could be a headwind for the industry.
Balance Sheet: AN remains highly cash generative, with $237 million of free cash flow, and the ability to continue buybacks, given its solid balance sheet. The company has 2.6x leverage, with $4 billion of non-vehicle debt.
The analyst continues to see AN as a buy opportunity, with shares trading at 9x earnings. Despite the new tariff risks, the resilience of maintenance activity through the economic cycle warrants a low-double-digit multiple, leading to fair value in the $190-$200 area. In light of these factors, the analyst is adjusting EPS expectations for the rest of the year to $18.00-$19.00, depending on the pace of buybacks.
- Unsurprisingly, AutoNation, Inc.'s (AN) solid Q1 performance in the face of Trump's tariff initiatives has led analysts to remain bullish on the stock's stock potential.
- The benefits of AutoNation's strategic investments in technology and workforce updates, such as technician productivity gains, have contributed to the company's continued outperformance in the finance and business sector.
- The analyst believes that the limited impact of auto tariffs on AutoNation is because of its diverse business model and natural hedges, with used car prices anticipated to rise temporarily as a gross margin opportunity.
- The strong earning results, low-double-digit multiple, and the analyst's adjustments to EPS expectations for the rest of the year make AutoNation, Inc. (AN) an attractive investing opportunity, with fair value estimated between $190-$200.
