Getting in on AutoNation (NYSE:AN) a Smart Move

When a company can announce that it's just had its “best quarter ever,” especially given the environment we're looking at these days, it's worth taking another look at that company. The company in question this time around is AutoNation (NYSE:AN), and the automotive retailer just put up some big numbers in the midst of a market in turmoil.

Best Quarter Ever

It's hard to argue with a phrase like “best quarter ever”, and for AutoNation, that's just what emerged. Third-quarter revenues came out at a hefty $5.4 billion, which pretty handily beat the already-impressive forecasts of $5.19 billion projected. Moreover, the company pulled in an earnings per share (EPS) figure of $2.38. That was well beyond the projected figure of $1.65 per share, and in an eye-catching stroke for the company, meant an all-time EPS record for the company.

The gains today alone were enough to send the company up a healthy 8% in pre-market trading, and so far this year, the company is up almost 30% over the same time last year. Gross profits per new vehicle sold were up 56% compared to the same time last year, and for used vehicles, gross profits improved 43%.

Analysts Are Less Supportive

AutoNation isn't just gaining traction among buyers; it's also gaining traction with the analyst side, though much more gradually than with buyers. Our latest research shows the consensus rating for AutoNation currently sits at “hold”, with one “sell” rating, four “hold” and four “buy”. That's something of an improvement, though; 30 days ago, the ratio was one “sell”, three “hold” and three “buy.” It's also gained substantially from 90 days ago, when the company had just one “buy” to its name.

The price target, meanwhile, has been steadily climbing for the last 180 days, meanwhile, going from a modest $40.50 then to a healthy $59.29 today. However, there's been one unusual change; for the first time, the price target actually reflects a downside over current pricing. This may reflect some aging in the price targets; the only analyst to actually increase price targets since July was Bank of America, who bumped up the figure from $76 to $77.

A Victim of Its Own Success

As is so often the case, however, these major successes come with problems all their own, and in this case, the problem is that the company has actually done too well.

Demand was brisk, as carbuyers discovered that they really weren't so interested in calling for an Uber (NYSE:UBER) ride or taking public transportation these days. AutoNation's CEO, Mike Jackson, noted that the phenomenon was also closely connected to individual carbuyers' desire to have their “own space that (they) define.” Jackson also noted that demand was increasing across the board, from entry-level sedans to luxury vehicles, thanks to not only customer preferences but also low-interest rates that make financing all the more attractive. That's likely not even considering the electric vehicle space, which has been growing for years.

However, with surging demand also comes a need for more supply, and supply has been the big problem for companies like AutoNation. Jackson revealed that inventories were lower at the end of the third quarter than at the end of the second. Inventories, Jackson further noted, are about 25% or more under where they should be, which is going to have some impact on pricing going forward.

That in turn will kick off some losses, almost inevitably. While low-interest rates will insulate some pricing from reality—what's the difference, some will figure, if you have to finance $25,000 or $27,000?—there will be lost opportunity in the system. For a purchase of that size, there will always be some price sensitivity. While Jackson is fairly convinced that there will be improvements in inventories as carmakers continue to get back to work following the coronavirus shutdowns, it is a gradual process.

The good news here is that AutoNation has likely won some converts, and when the time comes to buy new cars in a few years, those who had good experiences will likely come back. The bad news, however, is that the company's biggest gains may be behind it as those who were going to buy in already have. That's just the case with durable goods. Still, with new converts in the fold likely telling their friends and serving as the most reliable form of marketing—word-of-mouth—that bodes well for AutoNation's long-term future and makes it worth considering as a buy.