In Focus

Unscrambling Auto Nation

Driving Auto Nation through the Chicks' Dozen
by Chick Cheryl

1. Buy What You Know   I know my Ford Windstar minivan has an Auto Nation license plate holder on it, and I also know I see tons like it when I'm out on the road. Clearly, a lot of people are getting to know Auto Nation as they go out shopping for a new car. When we found ourselves at the Ford dealership, we actually had no idea we were also shopping at Auto Nation. The weird thing was, every dealership in the area seemed to have an Auto Nation flag flying out in front of it. Little did I know, we really didn't even have to leave our house to go to an Auto Nation and get the best deal and complete our transaction!

2. Keep It Simple Sister (KISS)   Auto Nation is America's largest automotive retailer both on and off the web. They own and operate nearly 400 vehicle franchises in 17 states, selling popular makes and models (approximately 39 different brands of vehicles, including  cars made by GM, Ford, DaimlerChrysler, Toyota, Honda and Nissan, luxury brands include, Mercedes-Benz, BMW, Lexus and Porsche). In the year 2000, Auto Nation sold more than 63,000 vehicles online. Wow, point and click on Amazon and I can get a book, point and click on www.AutoNation.com and I can be driving a new car!

3. Industry   Their industry is listed as "Retail (Specialty)". I'll say it's specialized, I can't imagine  a car seller competing against a clothing retailer! Competition in their own field is somewhat limited since the nearest competitor is one-fourth their size.

4. Leader In Its Field   As I stated above, they are the largest automotive retailer in the U.S., selling more cars and offering lower prices than any other auto retailer. It is important to understand that they are not a brokerage or a referral service, but a highly efficient retailer dealing with such volume that savings can be passed on to the customer. They have ranked consistently at the top of independent measures of online buying satisfaction. And why shouldn't customers be satisfied? Offering no-haggle low prices, the customer is able to make better product comparisons and intelligent buying decisions which, obviously, leads to a more pleasant car buying experience. What was that? A pleasant car buying experience? Maybe these people are onto something!

5. Repeat Profitability   This is a question many of us Chicks find a little bit dicey. Of course, there is repeat profitability here, however I certainly don't buy a new car as often as I open a can of coke. Hang on, I gotta go crack one of those babies now. Ahhh, nothing like that first sip of brown bubbly! The real question is whether its better for a company to make a small profit on a daily basis, or rake in a big profit every few years. I guess that's why we Chicks choose to have the best of both worlds, big profits (i.e. Large gross and net margins) as often as we can get them (i.e. High repeat profitability).

NOTE: For the following equations, I used quarterly report figures from the quarter ending 3/31/01. These numbers can be found at www.multex.com or feel free to use the Chick's Research A Company section that will provide you a direct link to those financial statements.

6. Gross Margin

(Sales - Cost of Goods Sold) / Sales

(4887.0 - 4149.2) / 4887.0 =

737.8 / 4887.0 = .15

.15 x 100 = 15%

Not too Chicky, that's a far cry from our desired 50%.

7. Net Margin

Net Income / Sales

59.9 / 4887.0 = .012

.012 x 100 = 1.2%

Again, this margin is pretty meager as compared to our 8% criterion.

8. Cash Vs. Long Term Debt

Cash* / Long Term Debt

83.0 / 825.3 = 0.1x

*cash, including marketable securities

I can't say I find the amount of long term debt too surprising. This is a relatively new company that had to spend a lot of money to create the sales volume it needed to offer such competitive prices. Many have criticized that Auto Nation grew too fast, going on a reckless buying spree. The company defends their actions saying they did it for a reason. They had a plan to buy the top dealers in every one of their markets before someone else beat them to it.

9. Flow Ratio

(Current Assets - Cash*) / Current Liabilities - Short Term Debt)

(4055.6 - 83) / (3034.2 - 825.3) =

3972.6 / 2208.9 = 1.79

Now this one is actually not too bad, coming in just a little north of our 1.5 criterion.

10. Increasing Growth

(Most recent quarter sales - last quarter sales) / last  quarter sales

4887.0 - 4701.8 / 4701.8 =

185.2 / 4701.8 = 3.9% growth

Looking on the bright side, at least they're growing! It seems so many companies these days are staring at flat lines in revenue. Unfortunately, sales have suffered a 6% decline since the same quarter last year.

11. Strong Management and Operating History   Auto Nation was the brain child of Florida businessman, H. Wayne Huizenga. He was also the one that turned Blockbuster, the video superstore, into a household name and from one garbage truck, created the nation's largest trash hauler. Based on these previous successes, many had high hopes and expectations for Auto Nation. The business was actually launched in 1995 with the goal of getting millions of Americans excited about the prospect and (previously arduous) process of buying a new car. He wanted to create an international network of new and used car stores, auto service centers, rental car companies and an auto finance unit that would take new cars from their short-term leases to rental car fleets then onto used car lots, all while keeping the customer very happy. Too much to ask? Well, maybe. For whatever reasons (spiraling costs, a sluggish economy), Auto Nation has done away with its used car stores and spun off its rental-car business. In December of 1999, Chairman Wayne Huizenga, offered the post of CEO to Michael Jackson. No, not the singer of Thriller, although investors were thrilled to have this Michael Jackson join the team. He was the man that led Mercedes-Benz to its turnaround in the U.S. luxury-car market.  

12. Buy On Sale
52 week high: 12.59
52 week low: 4.63
52 week average: 8.61
Current Stock Price (as of 8/17/01): 11.11