AutoNation, Inc. (AN) in Fort Lauderdale, Fla., operates as an automotive retailer in the United States through its subsidiaries. The company operates through three segments: Domestic, Import, and Premium Luxury. In comparison, Vroom, Inc. (VRM) in New York City operates an e-commerce platform to buy and sell new and used cars. It also offers financing solutions.

As governments worldwide reinstate lockdown and social distancing measures to limit the spread of the highly transmissible COVID-19 omicron variant, people are again starting to shy away from public transportation. Therefore, the demand for new and used cars is expected to increase despite high prices due to the impact of the global semiconductor shortage on production. This should drive sales by car dealership companies. Furthermore, as semiconductor chip shipments improve and plants return to full working capacity, the high demand for electric cars due to rising oil prices and climate change concerns should drive the industry’s growth. Therefore, we think both AN and VRM should benefit.

Over the past three months, AN has gained 15.4% in price versus VRM’s negative returns. Also, AN’s 72.9% gains year-to-date compare with VRM’s negative returns. AN is also the clear winner with 81.4% gains versus VRM’s negative returns in terms of the past year’s performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On November 16, 2021, AN announced the opening of AutoNation USA Phoenix Avondale, its second pre-owned vehicle store in the Phoenix market, and the fourth new AutoNation USA store to open in 2021. Steve Kwak, AN USA President, said, "Strong consumer demand for pre-owned vehicles creates an ideal environment for AutoNation USA to highlight our distinctive customer-centric experience and our coast-to-coast network of stores, which give customers a choice when they are shopping for vehicles,"

A law firm is investigating potential claims against VRM on behalf of its long-term stockholders on concerns about whether its board of directors breached their  fiduciary duties. It is alleged that VRM  had not demonstrated that it could control and scale growth with respect to its salesforce to meet the demand for its products.

Recent Financial Results

AN’s revenue increased 18% year-over-year to $6.38 billion for its fiscal third quarter, ended September 30, 2021. The company’s adjusted operating income grew 63% year-over-year to $503.30 million, while its adjusted net income from continuing operations came in at $361.70 million, representing a 71% year-over-year increase. Also, its adjusted EPS from continuing operations was  $5.12, up 115% year-over-year.

VRM’s revenues increased 177.6% year-over-year to $896.76 million for its fiscal third quarter, ended September 30, 2021. However, its adjusted loss from operations grew 145.7% year-over-year to $90.59 million, while its adjusted net loss came in at $94.71 million, representing a 150.2% year-over-year increase. Also, its adjusted loss per share was  $0.70, up 141.4% year-over-year.

Expected Financial Performance

Analysts expect AN’s revenue to increase 28.8% for the quarter ending March 31, 2021, and 26.4% in fiscal 2021. The company’s EPS is expected to grow 102.1% for the quarter ending December 31, 2021, and 65.9% for the quarter ending March 31, 2021. And its EPS is expected to grow 24.4% per annum over the next five years.

In comparison,  VRM’s revenue is expected to increase 95.9% for the quarter ending March 31, 2021, and 131.8% in its fiscal year 2021. However, its EPS is expected to decline 75% for the quarter ending December 31, 2021, and 14% for the quarter ending March 31, 2021. Also, VRM’s EPS is expected to decrease  16% per annum over the next five years.

Profitability

AN’s trailing-12-month revenue is 9.42 times what VRM generates. AN is also more profitable, with EBITDA and net income margins of 7.44% and 4.54%, respectively, compared to VRM’s negative returns.

Furthermore, AN’s ROE, ROA, and ROTC are 39.82%, 11.80%, and 14.31%, respectively, compared to VRM’s negative values.

Valuation

In terms of trailing-12-month P/S, VRM is currently trading at 0.62x, which is 63.2% higher than AN’s 0.38x. Furthermore, VRM’s 0.53x forward EV/S ratio is 10.4% higher than AN’s 0.48x.

So, AN is relatively affordable here.

POWR Ratings

AN has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. In contrast,  VRM has an overall F rating, which translates to Strong Sell. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

AN has a B grade for Growth, which is consistent with analysts’ expectations that its EPS will increase in the coming months. On the other hand, VRM has a D grade for Growth, which is in sync with analysts’ expectations that its EPS will decline in the near term.

Furthermore, AN has a B grade for Quality. This is justified given AN's 13.97% trailing-12-month ROTA, which is 134.2% higher than the 5.96% industry average. In comparison, VRM has a D Quality grade, which is in sync with its negative trailing-12-month ROTA, compared to the 5.96% industry average.

Of the 26 stocks in the Auto Dealers & Rentals industry, AN is ranked #2. However, VRM is ranked last out of 44 stocks in the Specialty Retailers industry.

Beyond what I have stated above, we have also rated the stocks for Value, Momentum, Stability, and Sentiment. Click here to view all the AN ratings. Also, get all the VRM ratings here.

The Winner

With the increasing demand for vehicles amid the resurgence of COVID-19 cases, the car dealership industry is expected to grow significantly in the near term. While both AN and VRM are expected to gain, we think it is better to bet on AN because of its robust financials, lower valuation, higher profitability, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Auto Dealers & Rentals industry here. Also, click here to access all the top-rated stocks in the Specialty Retailers industry.

AN shares were trading at $114.59 per share on Tuesday morning, up $0.31 (+0.27%). Year-to-date, AN has gained 64.19%, versus a 25.60% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

More...