JPMorgan downgrades AutoNation, says car dealer stock is overvalued

Published Tue, Feb 21 20237:03 AM EST

It's time to sell AutoNation as consumer demand for vehicles starts to pull back, according to JPMorgan. Analyst Rajat Gupta downgraded AutoNation to underweight from neutral, saying the car dealer stock is starting to look overvalued after its solid performance during the pandemic. "Execution through the pandemic has been robust and management has used excess [free cash flow] to reduce float by ~48% since the start of the pandemic, and leverage is still well in check at < 2.0x," Gupta wrote in a Tuesday note. "We believe recent capital deployment will have little accretion in the near-term, investments are expected to increase, buybacks are likely to take a step back, and move to more M & A and related execution credibility will take time to establish. Shares are trading at a ~5% premium on EV/EBITDA making risk-reward less attractive at current levels," Gupta added. AutoNation shares outperformed at the onset of the Covid pandemic. The car dealer stock jumped more than 40% in 2020, and surged more than 60% in 2021. Even in 2022, AutoNation's 8% fall was still better than the S & P 500's 19% slide. Strong consumer demand for vehicles amid low inventories buoyed car dealer stocks. On Friday, following strong fourth-quarter results, AutoNation shares surged to an all-time high and posted its best day in about three years . CEO Mike Manley attributed the results to operational execution, as well as all-time high earnings. Even so, the analyst expects that the whole sector could start to pull back as consumers deal with higher inflation and interest rates. The analyst's December 2023 price target for AutoNation of $130 implies shares can fall 17% from Friday's closing price of $157.30. Shares fell more than 2% in Tuesday premarket trading. AN 1D mountain AutoNation shares 1-day "After continued strength in 2023 for the franchise auto dealership sector, outperforming S & P 500 by 2,800 bps YTD (3,400 bps last 12 months), XRT by 1,600 bps (3,700 bps last 12 months) and used peer KMX by 1,400 bps (5,900 bps last 12 months), we believe the sector is likely to take a breather in the near-term," Gupta wrote. "While consumer data points and 4Q22 prints have been a relief YTD, contributing to the sector's recent outperformance, we do not believe seasonally less relevant Jan/Feb are great months to draw a fundamental trend with March/April likely to see a reversal given persistent rates/affordability pressures," he added. —CNBC's Michael Bloom contributed to this report.