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Stock Strategist

We're Optimistic About AutoNation's Road Ahead

The national brand opens doors in e-commerce, collision centers, parts, and used stores.

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Mid-cap narrow-moat franchise dealer  AutoNation (AN) entered 4-star territory earlier this year. AutoNation has about 260 stores and operates exclusively in the United States. Its stock price has declined by nearly 20% so far in 2017; AutoNation is an excellent operator with a top dealer CEO, and we do not think the sell-off is justified.

We think the decline is due to a variety of factors such as fear about what peak auto sales means for the industry and disarray in Washington, meaning that tax reform could be in jeopardy. Also, the company’s selling, general, and administrative expense as a percentage of gross profit has elevated in 2017 above 73% as a result of excessive discounting hurting new-vehicle gross profitability, and the company’s investment in its brand through AutoNation USA stand-alone used-vehicle stores, AutoNation-branded parts, four additional auction sites, and opening or acquiring 18 more AutoNation-branded collision centers (up from 70 recently). The company’s SG&A/gross profit ratio, typically in the upper 60s, is normally one of the best in the industry.

David Whiston has a position in the following securities mentioned above: AMZN. Find out about Morningstar’s editorial policies.