Typically when I write about individual stocks on this blog I share bullish ideas that I am either long or thinking about going long. I was recently doing some work on AutoNation (AN), however, and since the stock looks pricey to me I figured I would share a bearish case as well.
The reason for a contrarian like me to look under the hood of AutoNation is pretty straightforward. The U.S. automobile industry is obviously struggling right now but AN has strong management and the dealers are in better shape than the car markers themselves (cost structures are more in-line without union obligations, etc). Couple that with strong buy side interest from Eddie Lampert’s ESL Investments and Bill Gates affiliated Cascade Investments and my interest was peaked.
That said, it appears that I missed the boat on AutoNation, at least for now. The stock has soared 350% from under $4 per share to near $18, just below a 52-week high. The stock’s P/E of around 20x is high, but part of that is due to cyclically poor earnings during the current recession.
I looked back at AutoNation’s financial statements for 2006-2007 and found that earnings per share peaked at around $1.45 during the boom years. Even at that level of profitability, AN stock trades at 12 times earnings, hardly a bargain for a slow growing automobile retailer.
AutoNation has a strong share buyback program in place, which is attractive to me, and the auto retail business should slowly improve in coming years, so AN is on my radar screen. However, given the current price and the move the stock has already made (ESL and Cascade timed their buys very well), I am not a buyer here. If we got down to the low teens, perhaps I would take another look.
Full Disclosure: No position in AutoNation at the time of writing, but positions may change at any time