AutoNation (NYSE: AN) has reported its second quarter 2023 earnings results to end a tumultuous week in the stock market, sending the stock plummeting upon the release. Investors may be scratching their heads when seeing that all the KPIs (Key Performance Indicators) in the business came out all right, blowing past analyst expectations.
The stock is down by as much as 7.8% during Friday's trading session, which is not a good look for a stock with a lot of downside, considering it is still next to its all-time high price. Nonetheless, investors can remain calm and do the best thing that a long-term shareholder can sometimes do: nothing.
Selling upon mere adverse price action would be foolish; looking to buy immediately after the decline can also be risky, calling for a typical Wall Street critique of 'Trying to catch a falling knife.' Understanding where a potential bottom may be and why today's earnings results directly contrast the way the stock is reacting can act as another pillar of confidence for scared participants.
When to Pull the Checkbooks
Considering that the stock reached a recent all-time high price of $182.08, investors can begin to point toward the 'Bear Market' definition of a 20% retracement from this price. This simple calculation would suggest that the next support level, where markets may be looking to accumulate or consolidate before finding direction, is $145.66.
Remembering that stocks tend to go down out the window and then recover by climbing steep staircases, what seems to be a remote price level could become a reality sooner than later. Current - and potential - investors should consider sitting on the sidelines until these support ranges are reached and then see what the market is thinking regarding the stock.
Now, a theoretical purchase solely based on this support price level would be a foolish investment unless the strategy is to gamble money away, in which case AutoNation stock would be ill-suited. Understanding what happened in today's earnings results that made the stock drop and why the future is still bright for the company is critical to moving forward.
Revenues increased by a negligible 0.3% during the past twelve months. However, other drivers in the business have taken the spotlight. Gross margins expanded by 13% during the period, supported by inside and outside factors pertaining to management.
The easing of the vehicle market's supply chain, which had suffered dislocations during COVID-19, and management initiatives to cut unnecessary expenses have brought on a new wave of profitability for the company. A gross profit of $543 million will mark a record quarter for the firm, leading directly to management's reward to shareholders.
Management has repurchased up to 1.6 million shares from the open market during the quarter, at an estimated value of $207 million. Now, why else would insiders be buying back their stock? Surely they must think it is undervalued today or that the future prospects are as bright as ever.
Not only is the stock a gauge of the future, but other management decisions are also a sounding board of a resilient recovery in the underlying sector demand. AutoNation acquired five dealerships and opened a new AutoNation USA store; this can be another subtle hint of a new demand wave coming soon.
AutoNation stock is confirming these signs of undervaluation in other ways when placed next to other competing names in the space. CarGurus (NASDAQ: CARG) is seemingly overextended from a valuation standpoint, offering investors a forward price-to-earnings ratio of 22.2x.
Perhaps CarGurus is being valued above AutoNation due to today's decline in stock. Markets are typically forward-looking, so they were expecting a bearish reaction to earnings today, undervaluing the perceived future earnings for the company. However, as investors will see, this is good for those willing to wait.
Sporting a significantly lower forward P/E of 8.4x will make AutoNation a direct value play. Now that the worst seems to be behind and a new bottom in sight for investors to add - or start - positions, there is only one more thing to be added to this perfect mix: time.
Looking out for press releases, further buybacks, or even the following quarterly results can supplement the above-mentioned support level in the stock. Lining up as many catalysts as possible can guide investors to a less bumpy ride back up.