Key Points
AutoNation missed on earnings this morning, but sales beat.
AutoNation already bought back 9% of its shares so far this year, and plans to buy back 17% more.
AutoNation (NYSE:AN) shares jumped 5.1% through 12:30 p.n. ET Friday despite "missing" earnings this morning.
Analysts had expected the car dealer to earn $5.17 per share in Q3, but AutoNation actually reported a $5.11 per share profit. On the other hand, AutoNation reported $7 billion in sales for the quarter, about $80 million more than Wall Street had forecast.
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AutoNation Q3 earnings
AutoNation held its revenue more or less steady year over year, down less than 1%. Nevertheless, the company suffered steep declines in operating income (-16%), net income (-25%), and, to a lesser extent, earnings per share -- which fell only 14% as AutoNation bought back a large number of shares to concentrate what profits it did earn among fewer shares outstanding.
Management noted that after spending $620 million on share buybacks, shares outstanding have now declined 9% year to date. Furthermore,
What's next for AutoNation stock
And that's not all. Convinced that the market still values its shares too cheaply, AutoNation intends to continue buying back shares, and its board has authorized an additional $1 billion in future share repurchases. At the company's current $5.9 billion market capitalization, this implies the share count could fall by another 17%.
Is that wise?
AutoNation stock today costs 15% less than it did one year ago -- despite having the same revenue today as it had a year ago. On the other hand, these revenues are a lot less profitable today than they used to be. Buying back shares really only makes sense, then, if AutoNation expects to return to historic levels of profitability soon.
The good news: It does expect that -- and so does Wall Street. Forecasts based on management guidance see 2026 earnings rising 24% from 2025 levels -- then growing another 61% over the next four years. At its current valuation of less than 8x trailing earnings, AutoNation stock looks like a buy.
Which is exactly why management is buying it.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.