AutoZone, Inc. (AZO): Buy AutoNation, Inc. (AN) on Continued Strength in Consumer Spending and Pent-Up Demand

For example, the First Call median earnings expectation for 2013 is $2.89 per share, which is 12% above the 2012 result of $2.55 per share. The current pace of share repurchases seem adequate to realize earnings expectations even without improving auto sales. Since improved auto sales are already evident from the sales data mentioned above, it appears that the market is insufficiently discounting performance that should exceed expectations in the coming calendar year. Furthermore, margins have improved each year since 2009 as sales have increased.

The current earnings multiple of AutoNation is somewhat depressed (~10%) compared to its average valuation in the prior 3 years by TTM P/E or Price/Sales.  My expectation is that annual earnings will exceed $3 per share, and upon exceeding expectations AutoNation’s P/E multiple will expand to its long term average of 17.4x, corresponding to a price of approximately $53 per share, or 22% upside, to the most recent close of $43.44.

An added reason to purchase AutoNation shares at this moment is the seasonality of the business. Auto sales are usually strongest during the summer months, as consumers tend to make purchases when the weather is warmer for practical reasons and to enjoy the summer driving season. In the past twenty years, shares of AutoNation have outperformed the S&P 500 index the most during the months of April and May. Thus it appears that now is an excellent time to purchase shares, particularly given the recent pullback.

In closing, I would like to highlight the largest holders of AutoNation’s shares. The largest institutional investor in AutoNation is Eddie Lampart’s hedge fund RBS Partners, which owns $1.37 billion, or approximately 25%, of the company’s float. Mr. Lampart is a former director of the company, and while the holding has been reduced somewhat it still represents over 35% of his portfolio’s assets. Mr. Lampart’s continued investment in AutoNation is a positive sign given his understanding of the business and prior history. Furthermore, his diversification of the portfolio seems to be a moot point given how highly concentrated the holding still is. It is also refreshing to note that only six other funds count AutoNation among their top 10 investments, meaning that the trade is not a very crowded one. The next largest holder of the stock is the CEO Michael Jackson, who holds 1.14 million shares or $49.9 million, a value representing 5.8 years of his gross income. Apparently Michael thinks AutoNation is a great company, and I happen to agree.

The article Buy AutoNation on Continued Strength in Consumer Spending and Pent-Up Demand originally appeared on Fool.com is written by Brendan O’Boyle.

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