Falling car sales and predictions of an auto-price crash are taking their toll at AutoNation (NYSE: AN). The company’s President William Berman, suddenly and unexpectedly resigned on May 15, after just three months on the job.
Berman; who was also Chief Operating Officer, made his sudden departure the same week that Ford (NYSE: F) announced plans to lay off 10% of its salaried workforce and slash expenses by $3 billion. That raises serious doubts about the entire auto sector because has been of the industry’s bigger success stories; effectively marketing America’s most popular vehicle the F150 pickup truck.
Ford wants to lay off 20,000 people nationwide and 3,000 in the United States, a Reuters’ story indicates. Ford has around 200,000 salaried workers across the globe and 3,000 in the USA.
Ford’s announcement came after its sales fell by 7% in April 2017; the fourth straight month of lower sales volume in a row, Bloomberg reported. This indicates that the record auto sales in 2016 were over.
Other companies are suffering too, General Motors (NYSE: GM) reported having 100 days’ worth of unsold inventory; it normally has 70 days of unsold vehicles on hand. As result GM has scheduled 13 weeks of downtime at North American planets. The big Japanese brands are not immune either Honda (NYSE: HMC) saw its sales drop by 7% in April.
Is AutoNation Making Money?
Not surprisingly, Mr. Market has been punishing AutoNation for the changing auto sales patterns. Back on January 27, 2017, AutoNation shares were trading at $52.86, by May 19, 2017, that price had dropped to $39.84.
Are investors correct is AutoNation in trouble or a value investment? After all Americans bought 17.47 million new cars in 2017 and analysts expect them to buy more than 16 million vehicles in 2017. There is still quite a bit of money to be made in the auto business even if sales volume shrinks, but is AutoNation making it?
Well its revenue grew to a new high at the end of first quarter 2017, $21.63 billion. That was an increase over $21.04 billion in March 2017. The net income is higher than last year as well, $432.70 million vs. $427 million for March 2016. Although it is still lower than the $435.1 million reported in March 2015.
My guess is that the net income is down because of all the financing and other deals, AutoNation has to give customers. The biggest weakness in the U.S. auto business right now is that sales are largely driven by financing deals powered by low interest rates.
That explains why U.S. automakers like Ford and GM are so keen on foreign markets like China and India. There is less financing and more cash sales in those countries which makes them potentially more lucrative. It also poses a problem for AutoNation which has no dealerships in Shanghai or Mumbai.
How Much Money is AutoNation Making?
AutoNation has succeeded in growing its revenue but it is also struggling to make money. Some of the March 31, earnings report numbers reveal serious weaknesses at AutoNation including.
- A profit margin of 1.91% which is pretty good for a high-volume retailer. The problem is that AutoNation is not your typical high-volume retailer it sells big ticket items almost all of which have to be financed.
- A free cash flow of $95.50 million, which looks low for a company with $21.63 billion in revenues.
- Assets of $10.09 billion up slightly from $9.998 billion in March 2016.
- Cash and short-term investments of just $56.30 million which indicates a business with little or no float. That means AutoNation might have a hard time surviving any long term drop in sales.
- $503.40 million in cash from operations which is down from $505.80 million a year earlier. This is another indication of high operating costs and reliance on financing deals. Revenues keep rising but the cost of selling is slowly eating up all the profit.
Is AutoNation a Good Investment?
My take is that AutoNation is not a value investment because it has little or no float. The company simply lacks the cash to survive a downturn or take advantage of one. If auto sales drop considerably AutoNation might be forced to scale back and sell or close dealerships.
Some of its plans such as a scheme for standalone used car dealerships are questionable. Used car prices have been falling in recent years; by 4% in 2016 according to the NADA Used Car Guide, and some experts expect them to fall more. Morgan Stanley predicted a 50% drop in used car prices over the next few if that really happens the business will be devastated and AutoNation forced to pull out.
All this makes AutoNation a very poor investment; despite the 19.29% return on equity on March 31, 2017. That’s made worse by the complete lack of a dividend, which is an indication of a business with no float.
Sell AutoNation now because this stock has no place to go but down. Expect AutoNation to struggle with falling sales, declining income and collapsing stock prices for the foreseeable future.