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Here's My Top Automotive Stock to Buy Right Now

A global chip shortage, fiscal stimulus, and low rates has created a buying frenzy for cars, especially used cards. One company this has benefited greatly is AutoNation, Inc. (AN) which just saw it fifth straight record quarter. The party is expected to continue, especially with the stock trading so cheap. So, now is a great time to consider adding it to your portfolio.

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AutoNation, Inc. (AN) is the largest automotive dealer in the United States, with about 230 dealerships and over 300 locations. The firm also has six AutoNation USA used-vehicle stores, four auction sites, and 74 collision centers across 16 states, primarily in Sunbelt metropolitan areas. In addition, the company also sells used vehicles, parts, repair services, and auto financing.

The company’s second-quarter was an all-time quarterly company record. Earnings rose 243% year over year on an adjusted basis and were well above its second-quarter 2019’s adjusted EPS of $1.20. Same-store new vehicle unit volume rose 42% year over year, and used vehicle revenue grew 32% versus second-quarter 2019.

In fact, same-store revenue was an all-time record of $7 billion, nearly $1 billion above the consensus estimate. Its gross profit per new vehicle soared 89% in Q2, while the gross profit per used vehicle rose 24%. So, there is no denying the fact that AN has seen a surge in demand. 

Auto sales, in general, have been up with many consumers avoiding public transportation. Consumers have also been encouraged to buy via fiscal stimulus and low rates on purchases. In addition, the disruption of supply chains due to the semiconductor shortage has resulted in a short supply of new cars. 

That means for the available cars, which include used cars, prices have gone through the roof, which has undoubtedly benefited AN. Plus, there is substantial upside potential for its AutoNation USA stand-alone used-vehicle stores. While there are only five AutoNation USA used-vehicle stores, the company plans to open at least 95 more by 2030. That means a runway of growth over the next nine years.

More used-vehicle stores will allow the company to retail more of its used-vehicle trade-ins instead of dumping cars into auctions where the firm loses money. AN also owns collision centers and sells parts, repair services, plus auto financing. In fact, the company has been expanding its auto repair operations, which carry higher margins.

AN also has a sizable dealer network, enabling the company to relocate its inventory to better meet demand. This also helped AN reach a deal with Waymo to service its autonomous vehicles. AN had invested $50 million in Waymo in March of last year. In addition, its digital AutoNation Express service makes shopping at AN way more attractive than shopping at other dealers.

The company has an overall grade of A, translating into a Strong Buy rating in our POWR Ratings system. AN has a Growth Grade of A, which isn’t surprising as I’ve already mentioned that earnings were up 243% year over year. 

The company also has a Value Grade of A, which makes sense when you look at its valuation metrics. Its price-to-sales, price-to-free cash flow, and price-to-book are all well below the industry average. Plus, the stock has an upside as high as 50% based on analyst targets. 

We also provide Momentum, Stability, Sentiment, and Quality grades for AN, which you can find here. AN is ranked #2 in the B-rated Auto Dealers & Rentals industry. For more top stocks in this industry, click here.

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AN shares were unchanged in after-hours trading Tuesday. Year-to-date, AN has gained 64.39%, versus a 19.54% rise in the benchmark S&P 500 index during the same period.



About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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