Goldman Sachs downgraded its rating on AutoNation Inc. stock to “sell,” citing concerns about flattening U.S. auto demand in general and, in particular, the dealership group’s used-vehicle profit margins and increased exposure to oil-patch markets.
AutoNation, the largest U.S. dealership group, faces challenges in used-vehicle margins as it “works through” recalled inventory, Goldman Sachs analyst Patrick Archambault wrote in a note explaining the decision to downgrade the company’s stock. AutoNation said in September it no longer will sell used vehicles that have an open recall.
Archambault also cited AutoNation’s slowing sales in Texas and a $10 million marketing campaign for its recall policy as reasons for the downgrade.
AutoNation, of Fort Lauderdale, Fla., acquired a smaller dealership group in Texas last year, resulting in the state now accounting for 25 percent of its sales, up from 21 percent previously.
Add in Colorado, and the oil patch accounts for 32 percent of AutoNation’s sales, second only to Group 1 Automotive Inc., of Houston, among dealership groups that Goldman Sachs follows.
In addition, Goldman Sachs projects a “stagnant” annualized U.S. light-vehicle sales rate in 2016 and 2017, further putting a strain on AutoNation and other large dealership groups.
Archambault said Goldman Sachs could become “incrementally positive” on AutoNation shares, should the U.S. selling rate climb or if there is incremental sales growth in Texas, among other factors.
Goldman Sachs anticipates an annualized selling rate of 17.6 million in 2016 and 2017, compared with last year’s 17.5 million rate. Archambault said sales stagnation, combined with more passenger-car competition, larger luxury sedan inventory and an anticipated decline in used-vehicle prices, could weigh on AutoNation and other dealership groups such as Group 1, Penske Automotive Group Inc. and Sonic Automotive.
Goldman Sachs rates Penske as “sell,” and Group 1 and Sonic as “neutral.”