AutoNation, the largest U.S. retail auto dealer, owns and operates approximately 315 new vehicle franchises across the country. We like AN stock for several reasons at current levels, as discussed below.
We believe AN's recent earnings momentum will carry over into 2022, as supply chain issues and chip shortages help support recent auto price strength. AN also possesses one of the industry's strongest earnings track records, with adjusted EPS having topped consensus in each of the last 11 quarters.
We expect new and used vehicle prices to remain strong in 2022, after surging to record-high levels in 2021, supported by low inventory levels, global semiconductor shortages, and supply chain issues. This should help give AutoNation revenue and earnings momentum in the coming quarters.
In fact, the average U.S. new vehicle price stood at $47,077 in December (+13.9% Y/Y) and has hit record highs for seven consecutive months, according to Kelly Blue Book.
Meanwhile, the jump in used vehicle prices over the last several months has been even more dramatic: The Manheim Index, a widely used index of wholesale used vehicle prices, jumped by a staggering 47% in the past year.
However, what really sets AN apart is the company's aggressive stock buybacks. In the 12 months ended September 30, 2021, AN repurchased 23.9 million shares of common stock for $2.2 billion, representing a staggering 27% of the company's outstanding shares (including $879 million in Q3 2021).
AN also announced an additional $1 billion authorization, giving it $1.3 billion of total share repurchase capacity. We think this aggressive share count reduction will help support EPS growth in the coming quarters.
The company also recently hired industry veteran and former Fiat Chrysler CEO Mike Manley as its new CEO, a move we viewed positively. Manley had a track record of success with Fiat Chrysler, guiding the company through the completion of its merger of equals with French automaker PSA Group in early 2021.
The move helps lifts uncertainty associated with the company's management transition following the retirement of well- regarded and longtime chairman and CEO Mike Jackson.
AN possesses a strong balance sheet, with $1.8 billion of total liquidity (including $72 million of cash), and it had $2.7 billion of non-vehicle debt outstanding as of September 30, 2021. Its leverage ratio stood at only 1.4x at quarter-end, giving it the ability to continue growing both through acquisition and organically.
In 2021, AN announced acquisitions representing $800 million in annual revenue, including the purchase of Priority Automotive Group ($420 million of annual revenue), and has plans to open 12 new stores in 2022.
Looking at estimates and valuation, CFRA forecasts the company's adjusted EPS will total $17.40 in 2021 and $16.50 in 2022, up from $7.13 in 2020. On October 21, AN reported a 115% increase in adjusted EPS for Q3 ($5.12 vs. $2.38 and ahead of the consensus of $4.20), as net revenue rose 18% to $6.38 billion ($90 million above consensus).
Our 12-month target price of $165 implies a 2022 P/E multiple of 10.0x, a discount to its 10-year average forward P/E of 12.9x. Risks to our recommendation and target price include lower valuation multiples for auto retailers, increased dealer incentive spending, lower vehicle demand, and pricing for new and used vehicles.