New Car Sales Back in High Gear: Is AutoNation a Buy?

Auto sales experienced strong gains in May as all major US manufacturers posted much better results.  Chrysler showed the strongest growth to nearly 105,000 vehicles or 33% better than last year; its first month over 100k in more than two years.  Ford (F) and General Motors also posted better numbers, improving 22% and 16.6% respectively.  Ford sales would have been even stronger if not for the Mercury brand falling 11%, but Ford plans to phase out that brand in the near future.  Demand has begun to return after a significant lull over the last two years as cash strapped customers tried to get extend their vehicle’s life as long as possible.  Now, improving consumer confidence and a thawing in the auto loan market has helped fuel the rebound that has now seen sales increase for seven straight months.

In addition to solid reports from auto manufacturers, it is not surprising that auto retailers are also reporting better results.  AutoNation (AN), one of the largest auto dealers, reported new vehicle unit sales rose 22% to 19,283. Domestic new vehicle sales rose 28% to 5,852, while imported car sales increased 21% to 10,232. Premium luxury sales rose 15% to 3,199.  As you might expect, AutoNation’s stock is trading nearly 7% higher in morning trading and has reached a new 52-week high.

After many months of moribund sales, this is a welcome trend to both manufacturers and dealers alike.  However, this is what the market has been expecting according to the rapid appreciation among many stocks tied to the auto industry.  According to our methodology, many in the industry are currently Overvalued as their stocks have risen prior to a corresponding improvement in fundamentals, and we generally find that an inhospitable circumstance to buy into.  We see AutoNation as Fairly Valued at the current price level, which places it among our most favorable ratings in the space.

We are not saying that we expect auto sales to being to falter; rather that much of the current improvement has already been priced-in to these stocks.  For AutoNation specifically, the current valuation is not particularly appealing compared to historical norms.  Historically, the market has awarded AN with a price-to-sales per share of .15x to .27x over the last ten years, but based on current estimates for the full fiscal year (including overall sales growth of 15%) the current price to sales is .30x. The current price-to-cash earnings ratio rests within the historically normal range but it is on the high side.  So, we cannot blame investors for wanting to take advantage of AutoNation’s surging sales, but we would not recommend it on the basis of valuation.

Read the original story at Ockham Research