Why Does Wall Street Hate AutoNation?

"If you have nothing nice to say, don't say anything at all," is a mantra that's alive and well on Wall Street. Analysts prefer to cover stocks where their sentiment is bullish. Google (GOOG), for example, is a market darling. A full 34 of the 38 major firms with published analysis on the search giant give it a "buy" or "strong buy" rating. This series looks at the few stocks where Wall Street is generally bearish on a company's prospects

.

We have always had a fascination with cars in this country. We still love many of the car manufacturers. Unfortunately, analysts don't seem to have a whole lot of love for the country's leading auto showroom operator.

Wall Street isn't keen on AutoNation (AN). Of the 14 established analysts tracking the stock, not a single firm has a "buy" or "strong buy" rating on the company. Nine analysts have "hold" ratings, and that neutral call isn't as encouraging as it sounds. The other five have negative "underperform" or "sell" ratings on the company.

Revving the Engine

AutoNation is huge. The company watches over 258 new vehicle showrooms, selling 32 car brands across 15 states. And there doesn't seem to be anything wrong with AutoNation on the surface.

The company has beaten Wall Street's profit targets in each of its four past quarters. These same skeptical analysts see earnings climbing 11% to $2.12 a share this new year, pegging revenue to climb 7% to a healthy $14.6 billion.

Nor is auto retailer losing any steam. It posted an 11% spike in new vehicle sales last month relative to December 2010. AutoNation handed keys to 24,342 drivers last month. In welcome news to Ford (F) and General Motors (GM), AutoNation's domestic car sales climbed 17% and import brands were flat. There was a 32% surge in the premium luxury category, suggesting that the pent-up demand for that new car smell during the economic downturn is finally starting to kick in.

There are some -- but not many -- potholes ahead.

Not Exactly Paradise by the Dashboard Light

One of the reasons domestics have thrived at the expense of imports is that the tsunami and earthquake that tore through Japan last year temporarily shut down many of its plants and parts manufacturers.

Production is ramping up again on that front, and in October, AutoNation said that the showroom operator will be welcoming in roughly 30,000 Japanese imports that it will have to sell at lower profit margins.

Selling cars is a cyclical business, though potential buyers naturally are thrown for a loop when Toyotas have accelerator problems and Chevy Volt batteries catch fire several days after serious accidents.

If the economic recovery is starting to rear its head, the big-ticket luxury of automobiles would seem to be a natural beneficiary. However, even bearish analysts aren't disputing AutoNation's pole position here. Some pros are simply turned off by the valuations.

Haggling on Price

When Wells Fargo downgraded shares of AutoNation this summer -- from the neutral "market perform" to the bearish "underperform" -- the analyst was concerned about AutoNation's valuation.

Sponsored Links

AutoNation was trading at a 50% premium to publicly traded peers including Group 1 (GPI) and Penske (PAG), compared to its historical average of 16%.

The analyst had a point. AutoNation's stock had doubled over the past year to hit $40 at the time of the downgrade. The shares are down to the mid-$30s now, though still well above Wells Fargo's valuation range of $29 to $31.

A few months later, Bank of America followed Wells Fargo in downgrading AutoNation from "neutral" to "underperform." However, Bank of America's revision was based on the theory that domestic auto sales would be declining over the next few quarters. AutoNation's report -- and metrics out of Ford and GM -- offer a more encouraging prognosis.

The Antilock Brakes Are Kicking In

The original valuation argument against AutoNation remains.

The auto giant is fetching 17 times the $2.12 a share that analysts are projecting for 2012. That's a steep price when Penske and Group 1 Automotive are fetching multiples of 12 and 13, respectively.

It's a valid argument. AutoNation may have some advantages as the bigger player, but Penske is no slouch, with Wall Street forecasting $12.5 billion in sales. Group 1 is generating roughly half the revenue of AutoNation and Penske, but it's also growing slightly faster than its two larger rivals.

AutoNation isn't a bad company, it's just a bad stock relative to the available alternatives. Wall Street seems to see it that way, at least, and the numbers bear the argument out.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Ford. The Motley Fool owns shares of Google and Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors, Ford Motor, and Google. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor.