AutoNation trades at $220.56 and has moved in lockstep with the market. Its shares have returned 9.2% over the last six months while the S&P 500 has gained 7.7%.

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Why Do We Think AutoNation Will Underperform?

We're sitting this one out for now. Here are three reasons there are better opportunities than AN and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

AutoNation’s demand has been shrinking over the last two years as its same-store sales have averaged 2.8% annual declines.

2. Low Gross Margin Reveals Weak Structural Profitability

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

AutoNation has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 17.9% gross margin over the last two years. Said differently, AutoNation had to pay a chunky $82.05 to its suppliers for every $100 in revenue.

3. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for AutoNation, its EPS declined by 5.7% annually over the last three years while its revenue grew by 1.3%. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

AutoNation doesn’t pass our quality test. That said, the stock currently trades at 10.5× forward P/E (or $220.56 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.

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