Is AutoNation’s Stock Overvalued Compared To Avis Budget?

AN: Autonation logo
AN
Autonation

An automotive retailer which deals in new and pre-owned vehicles, Aut0Nation’s (NYSE: AN) P/S (price-to-sales) multiple of 0.2x is similar to the figure of 0.2x for Avis Budget Group (NASDAQ: CAR), a global car rentals provider. So, is Autonation stock appropriately priced compared to Avis Budget Group stock? We believe that AutoNation stock is overvalued compared to Avis Budget Group stock, due to the notable mismatch in their current P/S multiples when compared with returns and risk profiles for the two companies over recent years.

Avis Budget’s revenue growth is higher (1.9% average annual revenue growth over the last 3 years vs about -0.4% for AutoNation). In addition, Avis Budget’s returns are also higher. Specifically, Avis Budget’s net income margin (net profits as a percent of revenue) stood at over 3% in 2019, while AutoNation’s margins came in around 2%. Using another measure of return, Avis Budget’s 29% free cash flow margin (net profits adjusted for non-cash expenses as a percentage of revenue), is also higher compared to 18% for AutoNation.

Our dashboard AutoNation vs. Avis Budget Group: Is AN Stock Appropriately Valued Given Its Similar P/S Multiple Compared to CAR? details the fuller picture based on Revenue Growth, Returns (ability to generate profits from growth), and Risk (sustainability of profits), parts of which are summarized below.

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1. Revenue Growth

Avis Budget’s growth has been higher than AutoNation over the last three years, with Avis Budget’s Revenue expanding at an average rate of 1.9% per year from $8.7 billion in 2016 to $9.2 billion in 2019, versus AutoNation’s Revenue which declined slightly from $21.6 billion to $21.3 billion.

  • While it is still unknown whether car rentals will be more popular than car sales, the two are not really comparable. But leasing a car is surely more affordable as buying a car involves huge capital, particularly considering the current recession.
  • Although ride-hailing firms such as Uber continue to pose a threat to the rental-car industry, Avis is able to hold its footing on better-than-expected earnings growth, improving cost structure, and higher used-car prices. Especially during the pandemic, a decline in new vehicle inventory due to the forced shutdown of automakers, low-interest rates, and less inclination of people to travel in public transport, has led to increased used-car prices.
  • AutoNation gets about one-third of its automobile retail revenue from used cars, with the rest coming from new cars.

2. Returns (Profits)

Coming to Returns, Avis Budget has a clear edge over AutoNation.

  • AutoNation’s Free Cash Flows as a percentage of revenue stood at about 2.8% in 2019, below Avis Budget’s 29% over the same period. 
  • AutoNation’s Return on Invested Capital (ROIC) is slightly lower compared to Avis Budget(11% vs. 13%).

3. Risk

Avis Budget Group looks like the riskier of the two companies from the perspective of financial leverage.

  • Avis Budget’s Debt to Equity ratio stood at over 170% in 2019, as it has been taking on debt to refinance its fleet. In comparison, AutoNation has a debt to equity ratio of 43%.
  • That said, Avis has adequate liquidity to manage its operations and service its debt, with its liquidity standing at about $1.5 billion in the most recent quarter, comprising of approximately $1.3 billion in cash and equivalents and approximately $200 million in availability on its revolving credit facility. Avis has the cash to assets ratio of about 56%, which is much higher than AutoNation’s 4%.

The net of it all

In summary, the net advantage moves back to Avis Budget based on its higher revenue growth and better returns as compared to AutoNation. However, Avis Budget stands riskier among the two companies based on its relative debt burden, as well as the sensitivity of its stock price to revenue growth.

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