AutoNation posted stellar earnings for the third quarter as consumers resumed buying cars in a bid to avoid public transportation amid the pandemic. The company’s adjusted EPS more than doubled to $2.38 in 3Q20 from $1.18 in 3Q19. It topped analysts’ forecast of $1.65. Shares were up 1.9% on Wednesday.
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An improved business environment and AutoNation’s (AN) cost reduction and efficiency efforts helped in driving the earnings growth. The car retailer’s 3Q revenue of $5.40 billion declined 1% Y/Y but exceeded analysts’ forecast of $5.19 billion. The top-line performance reflected a recovery from the 15% revenue decline in 1Q. Revenue from new vehicles was down 4.4% to $2.75 billion but used car revenue increased 8.1% to $1.52 billion.
In the 3Q conference call, the company stated that it benefited from a strong pricing environment driven by low interest rates and a growing desire in consumers to own a vehicle amid the pandemic. The company also said that new vehicle inventory remains tight amid the pandemic and it expects the trend to continue into the next year. Several automakers had halted production in the early days of the COVID-19 outbreak resulting in inventory issues for auto retailers. (See AN stock analysis on TipRanks)
Ahead of the results, Seaport Global analyst Glenn Chin initiated coverage on AutoNation with a Hold rating. The analyst said that while he expects AutoNation to report strong 3Q results, he feels that the beat is already accounted for by the current valuation. He also noted that the company’s earnings growth has lagged the peer group over the past several years.
The Street is cautiously optimistic about AutoNation. A Moderate Buy consensus is based on 3 Buys, 4 Holds and 1 Sell. With shares rising 32% year-to-date, the average analyst price target of $64.71 indicates a modest upside potential of 2.7% in the months ahead.
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