AutoNation Shares Are Pricing In Weak Numbers, Takata Headwinds; Goldman Upgrades To Neutral

Goldman Sachs’ David Tamberrino believes that following its 7.5 percent decline since the beginning of March, AutoNation, Inc. AN shares have bottomed and that the stock could remain flat to slightly up in the near term.

Tamberrino upgraded the rating on the company from Sell to Neutral, while lowering the price target from $52 to $49.

Headwinds

The analyst believes AutoNation has been facing company-specific headwinds associated with used vehicle margin pressure, as the company worked its way through the recall of vehicles with the defective Takata airbags, limited SG&A leverage and high exposure to oil in the United States

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Although auto sales are still expected to either peak or plateau before beginning to decline in 2018, Tamberrino believes that AutoNation’s current valuation already reflects this expectation.

Positive Expectations

“As we turn Cautious on the overall Auto sector, we see modest room for Dealer outperformance given a slightly more defensive P&L from Parts and Service that should see continued solid growth as vehicles in operation within the P&S sweet spot continue to grow on the back of the last few years of strong and growing new vehicle sales,” the analyst stated.

Tamberrino also pointed out that AutoNation has continued to perform well with regard to its SG&A leverage, despite the more challenging environment, driving the recent EPS beat.

The analyst added, “[A]s we head into a slower growth environment we believe incremental accretive growth opportunities could arise given the significant fragmentation of the dealer network in the US – driving some manufactured revenue and profit growth.”

Full ratings data available on Benzinga Pro.