AutoNation (AN)

Automotive retail giant AutoNation (NYSE:AN) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 6.9% year on year to $7.04 billion. Its non-GAAP profit of $5.01 per share was 3.6% above analysts’ consensus estimates.

Company Overview

With a vast network of over 300 locations strategically concentrated in America's Sunbelt region, AutoNation (NYSE:AN) operates one of America's largest networks of automotive dealerships, selling new and used vehicles, parts, and services across multiple brands.

Buying a vehicle is a big decision and usually the second-largest purchase behind a home for many people, so retailers that sell new and used cars try to offer selection, convenience, and customer service to shoppers. While there is online competition, especially for research and discovery, the vehicle sales market is still very fragmented and localized given the magnitude of the purchase and the logistical costs associated with moving cars over long distances. At the end of the day, a large swath of the population relies on cars to get from point A to point B, and vehicle sellers are acutely aware of this need.

AutoNation competes with other major automotive retailers including Lithia Motors (NYSE:LAD), Group 1 Automotive (NYSE:GPI), Sonic Automotive (NYSE:SAH), and Penske Automotive Group (NYSE:PAG), as well as thousands of independent dealerships across the country.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $27.92 billion in revenue over the past 12 months, AutoNation is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because there are only a finite number of places to build new stores, making it harder to find incremental growth. To expand meaningfully, AutoNation likely needs to tweak its prices or enter new markets.

As you can see below, AutoNation grew its sales at a sluggish 1.3% compounded annual growth rate over the last three years (we compare to 2019 to normalize for COVID-19 impacts). This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

This quarter, AutoNation reported year-on-year revenue growth of 6.9%, and its $7.04 billion of revenue exceeded Wall Street’s estimates by 3.3%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. This projection doesn't excite us and indicates its newer products will not lead to better top-line performance yet.

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

AutoNation’s demand has been shrinking over the last two years as its same-store sales have averaged 2.8% annual declines.

In the latest quarter, AutoNation’s same-store sales rose 5% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

AutoNation has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 17.9% gross margin over the last two years. That means AutoNation paid its suppliers a lot of money ($82.05 for every $100 in revenue) to run its business.

In Q3, AutoNation produced a 17.6% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

AutoNation’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 4.8% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structureand low gross margin.

Analyzing the trend in its profitability, AutoNation’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, AutoNation generated an operating margin profit margin of 5.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

AutoNation broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

AutoNation’s free cash flow clocked in at $122.8 million in Q3, equivalent to a 1.7% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

AutoNation’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 16.5%, slightly better than typical consumer retail business.

AutoNation reported $97.6 million of cash and $4.27 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.65 billion of EBITDA over the last 12 months, we view AutoNation’s 2.5× net-debt-to-EBITDA ratio as safe. We also see its $367.9 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly AutoNation blew past analysts’ same-store sales expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. On the other hand, its gross margin missed. Overall, we think this was a decent quarter with some key metrics above expectations. The stock remained flat at $209.54 immediately following the results.

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in AutoNation.

AutoNation doesn’t pass our quality test. To kick things off, its revenue growth was uninspiring over the last three years, and analysts don’t see anything changing over the next 12 months. And while its popular brand gives it meaningful influence over consumers’ purchasing decisions, the downside is its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses. On top of that, its shrinking same-store sales tell us it will need to change its strategy to succeed.

AutoNation’s P/E ratio based on the next 12 months is 10.3x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $236.60 on the company (compared to the current share price of $209.54).