AutoNation Inc (NYSE:AN) recently experienced a daily loss of -1.79% and a 3-month loss of -9.88%. Despite these losses, the company reported Earnings Per Share (EPS) of 24.12. This has led to the question: is AutoNation (NYSE:AN) modestly undervalued? In this article, we delve into a comprehensive valuation analysis of AutoNation, providing insights that will help value investors make informed decisions.
AutoNation is the second-largest automotive dealer in the United States, with over 250 dealerships and 53 collision centers. The company also operates 16 AutoNation USA used-vehicle stores, a captive lender, four auction sites, and three parts distributors across 20 states. With a revenue of $27 billion in 2022, the company's new-vehicle sales account for nearly half of its total revenue. The company also generates income from used vehicles, parts, repair services, and auto financing. The current stock price is $149.92 per share, and the estimated fair value (GF Value) is $174.1, indicating that the stock is modestly undervalued.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value. It is calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line represents the fair value at which the stock should be traded. If the stock price is significantly above the GF Value Line, it is overvalued, and if it is significantly below, it is undervalued.
Based on this calculation, AutoNation (NYSE:AN) appears to be modestly undervalued. With a current price of $149.92 per share and a market cap of $6.60 billion, the stock seems to offer a higher long-term return than its business growth.
Investing in companies with poor financial strength can lead to a high risk of permanent capital loss. To avoid this, it's crucial to review a company's financial strength before purchasing shares. AutoNation's cash-to-debt ratio is 0.01, ranking worse than 98.21% of companies in the Vehicles & Parts industry. However, its overall financial strength is 5 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. AutoNation has been profitable for 10 out of the past 10 years, with an operating margin of 6.87%, ranking better than 63.72% of companies in the Vehicles & Parts industry. The company's profitability is ranked at 8 out of 10, indicating strong profitability.
One of the most crucial factors in a company's valuation is its growth. AutoNation's average annual revenue growth is 26.4%, ranking better than 89.97% of companies in the Vehicles & Parts industry. The 3-year average EBITDA growth is 50.3%, ranking better than 91.1% of companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) can further evaluate its profitability. AutoNation's ROIC was 14.22 over the past 12 months, while its WACC was 5.9, indicating that the company is creating value for shareholders.
In conclusion, AutoNation's stock appears to be modestly undervalued. The company's financial condition is fair, its profitability is strong, and its growth ranks better than 91.1% of companies in the Vehicles & Parts industry. For more information about AutoNation's stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.