Robust growth, however high leverage remains a concern for AutoNation

AutoNation, Inc. retails, finances, and also services new and used vehicles. The company also provides other related services and products, such as the sale of parts and accessories, extended service contracts, aftermarket automotive products, and collision repair services. With over 8mn customers, AutoNation is America's Largest Auto Retailer. AutoNation is a Fortune© 500 company with over 20,000 Associates at over 250 new vehicle franchises across United States.

Steady growth in revenues

AutoNation posted strong compounded annual growth rate (CAGR) of 10% in revenue terms over the fiscal period 2009-2013. The company revenues touched $17.52 Billion for the fiscal year 2013 versus $15.67 Billion for the fiscal year 2012, witnessing a growth of 12%. In the last 2 quarters (quarter ending Mar ’14 and Jun ’14), revenue growth came in at 7% and 8%, respectively on a year-on-year basis. The company has been maintaining revenues in excess of $4bn consecutively for the last 7 quarters. Extrapolating these results, the company is expected to further gr0w in terms of revenues.

Net margin expansion led to robust EPS growth

Although gross margin profile in the last two fiscal years (2013 and 2012) has come down a bit by one percentage-point or so, still the company gross margins are at good levels of 16%. Margins peaked out in the fiscal year 2009 at 18%. In the last quarter ending Jun ’14, gross margin stood at 16%. Despite gross margin facing some pressures for the last 2 years, the company has been quite successful in increasing its net profit margin largely due to lower depreciation and interest cost as a percentage of turnover. Net profit margin expanded by 12 basis points to 2.14% in the fiscal year 2013. The company’s net profit stood at $375 Million for the fiscal year 2013 as compared to $316 Million for the fiscal year 2012, a growth of 19% and the company almost doubled its net profit in the last 4 years.

Net margin expansion alongside revenue growth has led to EPS growing at a compounded annual growth rate of 30% during the last 4 years. The company reported EPS of $3.09 for the latest fiscal year as compared to $2.56 for the fiscal year 2012, registering a robust growth of 21%.

High leverage remains a concern, although benefiting RoEs

AutoNation’s net debt stood at $4.8bn as of fiscal year ended 2013, implying a net-debt equity ratio of 2.33x, which is going up year-on-year considering that net-debt equity ratio was only 1x in fiscal year 2009. However, there has been some relief in the net-debt equity ratio considering it was 2.7x as of fiscal year 2012. This is alarming from the cash flow point of view. Considering higher working capital requirements, the company doesn’t pay any dividends and prefers to plough back the profits. One point worth noting is that the company has been able to improve its return ratios. Return on Equity stood at 20% in fiscal year 2013 as compared to 18% in fiscal year 2012 and 14% in fiscal year 2011.

Sturdy performer largely led by EPS growth

Source: http://finance.yahoo.com

Conclusion

Company has been steadily growing its revenues (10% CAGR over the fiscal year 2009-2013). However, off lately, the company is facing marginal pressure at the gross margin level, considering wage increase and higher input cost. However, at the net profit level, the company is doing well due to better economies of scale (almost doubled its net profit in the last 4 years). The company’s high net-debt to equity ratio of 2.33x as of fiscal year 2013 is one area of concern. Higher working capital requirements restrict the company to declare any dividends.