(By Balaseshan) Deutsche Bank (DB) analyst Rod Lache downgraded his rating on shares of AutoNation Inc. (NYSE:AN), an automotive retailer, to "Sell" from "Hold" based on valuation, and lowered his price target to $24 from $29.
Lache said key concerns are headline risks associated with contagion from Europe and the U.S. "fiscal cliff" debates, low expectations for the U.S. employment growth to generate a further leg-up in the SAAR, and margin risk from intensifying inter-dealer competition in a no-growth environment.
AN's current price-to-earnings multiple of 15.2 times on 2013, is 24% above the 10-year average of 12.2 times, an about 50% relative expansion versus the S&P 500 (current multiple 20% below 10-year average). The analyst continues to see AN as deserving of a premium multiple given its history of operational efficiency and shareholder value creation.
Also supportive of the stock is the fact that potential share buybacks still represent a meaningful portion of the current free float and could provide decent support for the stock for as long as the AN's major shareholders wish to maintain their positions.
Nevertheless, Lache expects max leverage levels to drive a slowing of the buyback activity versus Q1 levels and current valuation is not justified by a discounted cash flow (DCF) Analysis. Therefore, he sees the risk/reward as increasingly unfavorable.
The analyst believes that consensus 2013 expectations include a U.S. SAAR expectation of about 15 million, which he sees as inconsistent with current market conditions. Higher-than-expected SAAR levels through April (14.5 million) appear to have been driven more by pent-up demand and unseasonably warm weather than originally thought, evidenced by a moderation to 13.7 million in May and early indications of 13.8 million in June.
Lack of growth in 2013 could present further downside risks to estimates from margin compression (inter-dealer competition may intensify in a no-growth environment). Finally, Lache has noted a modest slowdown in used vehicle industry sales and low miles driven and declining 1-5yo vehicle population will likely continue to drag on parts/service results.
The brokerage lowered its 2013 EPS estimate to $2.37 from $2.45, saying valuation too rich given flattish growth expectations.
AN is trading down 4.07% at $34.41 on Monday.