AutoNation

AutoNation's second-quarter adjusted diluted earnings per share of $5.56 rose 1.8% year over year as share repurchases more than offset the impact of a 1.5% same-store revenue decline. The firm spent $157 million on buybacks in the quarter and has spent $470 million this year through July 29.

Why it matters: We calculate that, using the prior-year quarter's diluted share count, EPS would have been $4.90, a 10.3% year-over-year decline, which may partially explain the stock's 1.1% decline on July 31. Still, we think the firm had a good quarter given the uncertain US macro environment. We feel service is an underappreciated aspect of an auto dealer's operations as it is very profitable with a gross margin of nearly 50%, and it constitutes almost half of AutoNation's gross profit. It mitigates much of the cyclicality in new- and used-vehicle declines, as service revenue rose 3.4%. Although adjusted operating income fell 7.1%, we calculate adjusted free cash flow grew 17.1% on inflows from working capital and the AutoNation Finance captive finance arm. This cash flow funded buybacks, which enabled adjusted EPS to rise for the sixth straight quarter.

The bottom line: We increased our fair value estimate for narrow-moat AutoNation to $238 from $234 on the time value of money and a lower share count. We expect continued earnings growth long-term from buybacks, organic growth, and acquisitions. Share repurchase spending through June was $457 million, an 80% increase from the first half of 2025. Management told us that residual cash flow (we assume after reinvesting and acquisitions) will be used for buybacks. We calculate that AutoNation has reduced its diluted share count by 93% since 1998. AutoNation Finance income more than quintupled year-over-year to $10.7 million. The lender recently completed its third securitization, and its loan book is $2.7 billion versus $1.8 billion a year ago. Cash generation from multiple sources should fund acquisitions and buybacks.

We are increasing our AutoNation fair value estimate to $238 per share from $234 on the time value of money since our last update. Our weighted average cost of capital is 8.0%. Our midcycle operating margin, including floor plan interest expenses, is about 4%. Our midcycle operating margin reflects margins that we think can range from below 2.5% in bad times to at least the high 4s in good times. We do not consider 2021-23 levels of as much as over 7% to be maintainable, as new-vehicle pricing power has lessened following the end of the chip shortage.

We continue to see a healthy long-term growth runway as AutoNation is one of the largest players in what is still an extremely fragmented yet consolidating sector. We calculate that the adjusted operating margin, including floor plan interest expense, for 2022 was a record 7.4% and declined to 5.7% in 2023, 4.2% in 2024, and 4.3% in 2025. In our model, if we took operating margin, including floor plan interest, in the final two years of our five-year explicit forecast period, up to 4.5% in each year, our fair value estimate would be $283 per share. We believe that although the auto dealership industry is a good industry, it is still a cyclical one. However, we think AutoNation's size, brand, and digital storefront and shopping experience, AutoNation Express, will enable the company to continue driving market share gains and may provide enough selling, general, and administrative leverage for further meaningful margin expansion in good economic times. The Waymo service contract opens up a new channel for long-term revenue growth as well; AutoNation invested $50 million in Waymo in March 2020. The mobile service business started in 2023 with the RepairSmith (now called AutoNation Mobile Service) acquisition, which should also open new doors for growth, such as perhaps providing quality assurance for consumers selling their vehicle to another consumer.

We model a single-digit number of AutoNation USA stores opening through 2030, as management's enthusiasm for more stores has fallen off from a few years ago. AutoNation Finance, the captive finance arm, should provide meaningful profits several years from now once it scales up and was profitable for the first time in 2025 with $9.8 million pretax profit. Loan assets as of the end of the second quarter were about $2.7 billion, and management guides for these loans to be 2.5-3 times more profitable over their duration compared with traditional dealer reserve commissions. The captive issued its first asset-backed securitization sale in the second quarter of 2025 and completed its third in June 2026. AutoNation Finance at the end of June was funded via 91% nonrecourse debt through three warehouse credit lines. Over time, once ABS activity is frequent, we expect the captive to be nearly fully funded via nonrecourse debt.

We believe the company's cost structure will enhance its scale benefits as vehicle sales volumes improve. We forecast revenue to grow at about a 4.5% rate on a five-year compound annual basis during our five-year forecast period, and the US new-vehicle share approaching 2% at the end of our five-year explicit forecast period. We expect operating margin, including floor plan interest expense, to average around 4.1% and capital expenditures to average 1.2% of sales. We model about $400 million-$500 million annually for cash paid for acquisitions (slightly more in 2026) and $300 million-$400 million a year for share repurchases, though 2026 is modeled at over $700 million given spending through July 29 of $470 million at an average price of $200.46 per share.

We give AutoNation a Morningstar Economic Moat Rating of narrow, as its size continues to generate economies of scale and working-capital efficiencies while the service segment's warranty work gives the company an intangible advantage over garages. A large dealer such as AutoNation can move inventory among different stores within a market where it will be in greatest demand, something a small dealer with just one or two stores in that same market cannot do. We think the dealer sector is the best business in the automotive supply chain. Public dealers can centralize back-office operations and generate far more volume than small dealers, thereby bringing scale. Dealers have no burdensome retiree expenses, and the large public dealers are not dependent on the health of one brand. The dealers enjoy mid- to high-single-digit gross margins on new vehicles and 100% gross margins on financing and insurance. We think the best source of competitive advantage is the parts and service operations. Many customers bring their vehicle to the dealer for servicing, either because the vehicle is under warranty or the dealer is close to home and has the factory parts and expertise to service the vehicle. Once vehicle owners know a dealer, we think they are likely to keep going back to the dealer for service. The dealer knows the vehicle, and comparison shopping for repair work is very time-consuming because the customer has to bring the vehicle to each shop to get a quote. These cost advantages and intangible advantages from service give dealers a moat.

These logistics create inelasticity of demand, which confers pricing power on the dealer and is a source of strong profits in good times and bad. In fact, during a downturn in new-vehicle sales, dealers generally report higher gross margins due to a favorable mix shift toward parts, but then report lower operating margins due to deleverage in selling, general, and administrative expenses. Excluding large impairment and restructuring charges, dealers can still report positive EBIT even in a severe recession. Although most dealerships are good businesses, we think the large publicly traded dealers are best positioned for growth since they can be the most flexible in changing brand mix and can more easily invest in omnichannel shopping capabilities. Many small-business owners are choosing to exit or sell because they cannot get the scale on a variety of expenses compared with large dealer groups or do not want to invest to have a large digital brand. AutoNation is one of the largest dealers in the US, yet has only about 1.6% new-vehicle market share. About 91% of dealer owners own between one and five stores per the National Automobile Dealers Association, so we see a long growth runway for consolidators such as AutoNation.

AutoNation may further its advantage over smaller dealers with its AutoNation Express initiative, which it started in December 2014. Thanks to an IT investment of over $100 million and a single established national AutoNation brand, customers can select a vehicle online with a price given online and reserve the vehicle with a credit card for 48 hours. The customer then comes to the store and takes a test drive. For a cash deal with no trade-in, the customer can leave in a new vehicle within 30 minutes. Small dealers also cannot have their own branded parts, which lowers AutoNation's reconditioning costs, nor can they get a nationwide service contract for an autonomous vehicle fleet, as AutoNation has with Waymo. The January 2023 acquisition of mobile service provider RepairSmith (later rebranded to AutoNation Mobile Service) also helps differentiate AutoNation from smaller dealer groups.

In 2015, AutoNation enhanced the Express program so that customers receive a trade-in offer online. After self-reporting the trade-in's condition, the customer can then fill out a loan application online and see loan offers, buy online finance and insurance products such as an extended warranty, and eventually be able to sign documents electronically at home to further reduce time in the store. Pricing on used vehicles is no-haggle. This type of project can only be completed by the largest dealers, who are well-capitalized through large credit lines and the capital markets. An omnichannel experience should also prove more attractive to millennial and Generation Z customers, who will also be searching online, where AutoNation is one of the few franchise dealers with something close to a national brand. It rebranded all 15 of its regional brands in 2013 as AutoNation and is investing in more advertising to enhance its brand equity and achieve reach that a small competitor could never have.

AutoNation's massive size provides some appealing economies of scale, illustrated by strong operating margins.

AutoNation has been expanding its auto repair and used-vehicle operations, which generally carry higher margins and are less cyclical than new-car sales.

AutoNation Express makes the shopping experience far more attractive to consumers than shopping at most other dealers. AutoNation USA and the Waymo AV service deal add to the upside potential.

About half of revenue is derived from new-car sales, leaving AutoNation vulnerable to the fluctuations of a viciously cyclical industry. This risk is greater for AutoNation as it gets a much larger share of its sales from California and Florida than the national average. These markets could be hit worse than other US markets in a housing downturn or by hurricanes.

Even the lucrative parts business often cannot wholly offset severe declines in new- and used-vehicle revenue.

Startup costs for AutoNation USA, the captive finance arm, and tech investments may compress margins for awhile.