Why AutoNation Stock Popped After Earnings

AutoNation's shares rose by 5.1% on Friday, despite missing earnings expectations for Q3. Analysts had anticipated the car dealer to earn $5.17 per share, but the company actually reported a $5.11 per share profit. However, AutoNation's sales for the quarter were $7 billion, which was around $80 million higher than Wall Street had predicted.

The company's revenue remained relatively stable year-over-year, decreasing by less than 1%. Despite this, AutoNation faced significant declines in operating income (-16%), net income (-25%), and earnings per share (-14%). The reduction in earnings per share was primarily due to the company repurchasing a large number of shares, which decreased the shares outstanding by 9% year to date.

Management revealed that after spending $620 million on share buybacks, the company now has fewer shares outstanding. Furthermore, AutoNation plans to continue buying back shares, as its board has authorized an additional $1 billion in future repurchases. With a current market capitalization of $5.9 billion, this could potentially reduce the share count by another 17%.

The company's stock price has decreased by 15% compared to a year ago, even though its revenue remains the same. However, the revenues are less profitable today compared to the past. The decision to repurchase shares makes sense only if AutoNation expects to return to its historic level of profitability soon. Wall Street shares this view, with forecasts based on management guidance predicting a 24% rise in earnings from 2025 to 2026 and an additional 61% growth over the next four years.

Given its current valuation of less than 8x trailing earnings, AutoNation stock appears to be a worthwhile investment, which is why management is keen on acquiring it.