In this article, we discuss 5 most undervalued auto stocks according to hedge funds. If you want to see more stocks in this selection, check out 11 Most Undervalued Auto Stocks According To Hedge Funds.
5. AutoNation, Inc. (NYSE:AN)
Number of Hedge Fund Holders: 33
P/E Ratio as of January 19: 4.52
AutoNation, Inc. (NYSE:AN) is a Florida-based automotive retailer that operates through three segments – Domestic, Import, and Premium Luxury. On December 12, AutoNation, Inc. (NYSE:AN) announced its acquisition of RepairSmith, a mobile automotive repair and maintenance company. The acquisition will allow AutoNation to become an all-inclusive transportation solutions company rather than simply an auto dealer. It is one of the most undervalued auto stocks according to elite investors.
On January 17, Morgan Stanley analyst Adam Jonas downgraded AutoNation, Inc. (NYSE:AN) to Underweight from Equal Weight and trimmed the price target to $96 from $104. The analyst lowered franchise dealer forecasts and downgraded AutoNation, Inc. (NYSE:AN) after “bellwether” CarMax, Inc. (NYSE:KMX)’s disappointing results. Declining used car prices and growing interest rates may take affordability to a “tipping point,” increasing downside to selling prices and units, the analyst told investors in a research note. He is looking for better entry points in the auto space.
According to Insider Monkey’s Q3 data, 33 hedge funds were long AutoNation, Inc. (NYSE:AN), compared to 31 funds in the last quarter. Cliff Asness’ AQR Capital Management is the leading position holder in the company, with 1.03 million shares worth $105.5 million.
Here is what Black Bear Value Partners has to say about AutoNation, Inc. (NYSE:AN) in its Q4 2021 investor letter:
“AutoNation is an example of what can happen when you marry excellent business operations with best-in-class capital allocation. Mike Jackson and his team have been able to reinvest in the business, grow ancillary businesses, and acquire new dealerships all while buying back TONS of stock when the opportunity presents itself (27% of the company over the trailing 12 months ending 9/30). Other companies should take notice and use AutoNation as a case study in compounding value for shareholders while also being great corporate citizens. Auto dealers have been over-earning on car sales due to a lack of inventory from the semiconductor shortage. It seems obvious that when the semiconductor shortage is resolved, more cars will become available and unit profitability will be reduced. In short, their earnings will likely decline in the 12 months following the inventory shortage and then resume their rise. Our longer-term horizon allows us the ability to own the business and not focus on a short-term issue. The semiconductor issue is likely to persist thru 2022 though this is a guess. Ultimately our long-term thesis on the business remains intact. If the business can extend its moat, maintain its pricing power, and remain important to both its customers and suppliers we will do fine. Over the last 12 months ending September 30, 2021, the company has bought back 27% of the shares at a cost of ~$81.50. Given the stock has been trading at $100+ it has been a good investment on a mark-to-market basis. More importantly, we own 27% more of the company without having to lay out a single dollar of cash. It has a dramatic impact on my estimates of free cash flow on a per-share basis. Looking forward the Company should be able to generate $10-$14 per year in free cash flow which means we likely own it somewhere between an 8-12% yield. Additionally, if AutoNation achieves modest levels of success with AutoNation USA (new used-car supercenters) it could add another $6-$12 of per-share value to the business. Note that at current prices, very little in the way of AutoNation USA’s success is priced in.”
