AutoNation Earnings: Profit Declines Are Not as Bad as They First Sound

AutoNation's second-quarter adjusted EPS of $6.29 declined 2.9% year over year but still beat the Refinitiv consensus of $5.91. We think the stock falling by over 11% during July 21 trading is from some investors taking profits. The stock increased by about 70% in 2023 before the July 21 drop, after management said on the call that new vehicle profits will continue to moderate as inventory rises. This remark should not be surprising, as inventories have been very low due to the chip shortage, and dealers we cover have long said they expect profits to fall from recent record levels but remain above prepandemic levels. We agree with this prediction because we don't expect inventory to return all the way to prepandemic levels, which should reduce the need for discounting as much as in the past. Therefore, we are leaving our fair value estimate unchanged.