AutoNation: Superb Economics With Minimal Reinvestment Opportunities

Investment Thesis - AutoNation, Inc. is a leading player in the US automotive retail industry with a broad operational footprint including new and used vehicle sales, parts and service operations, and automotive finance and insurance products [4] - The company operates 347 new vehicle franchises from 251 stores across the US, focusing on the Sunbelt region and selling 32 different new vehicle brands [4] Financial Performance - AutoNation generates approximately $1.5 billion in free cash flow each quarter, with a return on invested capital (ROIC) exceeding 20% [5][39] - The company has a capital turnover of around 4.5x and an inventory turnover of approximately 7x, indicating strong operational efficiency [5][39] Competitive Advantages - AutoNation enjoys pricing advantages due to high sales volumes, lower operating costs, and better asset utilization, resulting in ROICs that are about 6 times higher than the median peer [6][7] - The company has a competitive advantage period estimated at 14.5 years, allowing it to sustain returns above 12% [14][15] Management and Capital Allocation - Management has been actively buying back stock, reducing the share count by approximately 36 million since FY'21, which reflects a strong commitment to returning capital to shareholders [16][22] - Despite generating significant free cash flow, only about 5% of net operating profit after tax (NOPAT) has been reinvested into the business, with the majority allocated to buybacks [16][20] Valuation Insights - The current valuation of AutoNation is approximately $214 per share, with a compound annual growth rate (CAGR) of 8-10% projected through FY'26 [5][31] - The stock is considered attractively valued at around 9x NOPAT, with a margin of safety of about 25% [25][39] Future Growth Potential - AutoNation's future growth opportunities are expected to warrant a higher valuation multiple, with potential expansion to around 15x NOPAT in favorable scenarios [27][29] - The company is projected to maintain steady revenue growth, with estimates indicating revenues of approximately $26 billion by Q1 FY'25 [40]