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Here's Why You Should Hit the Buy Button on AutoNation (AN)

AutoNation AN is benefiting from high demand for vehicles amid a preference for personal mobility and a rise in consumer spending. Shares of this auto retailer have rallied 82.8% year to date, handily outperforming the auto sector’s 18.6% growth. We are positive about the company’s prospects and believe that the time is right for you to add the stock to the portfolio as it looks promising and is poised to carry the momentum ahead.

AutoNation currently carries a Zacks Rank #1 (Strong Buy) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, combined with a Zacks Rank #1 or 2 (Buy), offer the best investment opportunities to investors.

Let's see what makes this noted auto player a compelling investment option at the moment.

Estimates Moving Up

Over the past 30 days, the Zacks Consensus Estimate for AutoNation’s 2021 earnings has been revised upward by 43 cents per share. The consensus estimate for 2022 has also been revised 8.6% upward over the same time frame. The favorable estimate revisions instill investor confidence in the stock.

Positive Earnings Surprise History

AutoNation outpaced the Zacks Consensus Estimate in the last four quarters. In this time frame, it delivered an earnings surprise of 40.9%, on average.

Solid Prospects

The Zacks Consensus Estimate for AutoNation’s 2021 earnings is currently pegged at $17.17, indicating year-over-year growth of 141.2%. The same for sales suggests 26.1% growth for 2021.

Attractive Valuation

AutoNation’s valuation looks attractive as the stock is currently trading at a level that is lower than the auto sector average, suggesting that it still has upside potential.

Going by the EV/EBITDA (Enterprise Value/ Earnings before Interest, Tax, Depreciation and Amortization) multiple, which is often used to value auto stocks, AutoNation is currently trading at 5.34 for the trailing 12-month period, which is cheaper than the industry average of 15.56.

Set to Maintain the Bull Run

AutoNation’s diversified product mix and multiple streams of income reduce risk profile and augur well for earnings and sales growth. A strong footprint, large dealer network, and aggressive store expansion efforts along with its brand extension strategy and alliances are praiseworthy.

The buyout of 11 stores and one collision center from Peacock Automotive Group boosted AutoNation’s portfolio and is set to add $380 million in its annual revenues. The buyout of Priority 1 Automotive would add approximately $420 million in annualized revenues. Encouragingly, the firm aims to sell 1 million combined new and pre-owned vehicles on an annual basis, through organic growth, expansion of AutoNation USA and future buyouts.

Enhanced digital solutions helped AutoNation to further boost profitability and market presence. Initiatives like ship-to-home next day, curb-side pick-up option, and buy online, pick-up in stores options are picking pace, driving additional traffic to the company’s online site. Omni-channel marketing remains a key component of the company’s long-term strategy and is likely to fuel revenues in the future. The company has stepped up digitization game with the launch of a digital platform AutoNation Express, which enables customers to buy and sell vehicles online, thereby providing them a truly comprehensive and personal experience.

Increased focus on cost discipline is anticipated to aid margins. AutoNation is committed to operate below or at 60% SG&A as a percentage of gross profit in 2021, signaling a major improvement from the 71-73% range over the last several years. Its adjusted SG&A as a percentage of gross profit was 56.9% in the last reported quarter, representing a 750-basis point improvement year over year.

Balance sheet strength and investor-friendly moves are other tailwinds. As of Sep 30, AutoNation had $1.8 billion of liquidity, including $72 million in cash and approximately $1.8 billion under the revolving credit facility. Its times interest earned ratio of 13.4 compares favorably with the industry’s 10.5. Thanks to solid income generation and a strong liquidity profile, the firm recently increased the share-buyback authorization up to an additional $1 billion, thereby boosting investors’ confidence. As of Oct 19, the company had $1.3 billion remaining under the current share repurchase authorization and 66 million shares outstanding.

Other Auto Biggies Worth Betting On

Other top-ranked stocks worth considering in the auto space include Tesla TSLAGoodyear Tire GT and Harley-Davidson HOG, each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tesla: With Model 3 being its flagship vehicle, Tesla has established itself as a leader in the electric vehicle segment. Currently, Model 3 is the best-selling premium sedan in the world. Along with the rising demand for Model 3, which forms a major chunk of the automaker’s overall deliveries, Model Y is boosting Tesla’s prospects. Tesla has also started making progress at ramping up volumes of Models S and X.

Tesla has an expected earnings growth rate of 166.9% for the current year. The Zacks Consensus Estimate for TSLA's current-year earnings per share has been revised upward by 7 cents over the past 30 days. The company beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missing once. It has a trailing four-quarter earnings surprise of roughly 25.4%, on average. TSLA has rallied around 57.2% year to date.

Goodyear: Goodyear’s acquisition of Cooper Tire, which closed in June, strengthened the firm's leadership position in the global tire industry. The buyout of Raben Tire also expanded its network and strengthened Goodyear’s ability to serve fleets. Goodyear’s TireHub joint venture with Bridgestone bodes well for its long-term prospects. 

Goodyear has an expected earnings growth rate of 196.8% for the current year. The Zacks Consensus Estimate for GT's current-year earnings per share has been revised upward by 80 cents over the past 30 days. The company beat the Zacks Consensus Estimate for earnings in the last four quarters, with an average of 228.5%. GT has rallied around 105% year to date.

Harley-Davidson: In sync with long-term growth objectives to optimize the product portfolio and expand the customer base, Harley-Davidson is focusing on motorcycle models and technologies that better align with market trends. The firm's turnaround plan — dubbed as ‘Rewire’ — and five-year strategic plan ‘Hardwire’ boost optimism. HOG’s new operating model and organizational structure have improved effectiveness across all functions.

Harley-Davidson has an expected earnings growth rate of an astounding 35,900% for the current year. The Zacks Consensus Estimate for HOG’s current-year earnings per share has been revised upward by 32 cents over the past 30 days. HOG beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missing once. The stock has moved up around 7.2% year to date.

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HarleyDavidson, Inc. (HOG): Free Stock Analysis Report
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