On Thursday, Morgan Stanley raised its rating on AutoNation Inc. (NYSE: NYSE:AN) from Underweight to Equalweight and increased the price target to $140 from $117.
The firm's assessment suggests that AutoNation and Group 1 Automotive (NYSE:GPI) are well-positioned to navigate current market dynamics compared to their peers within the franchise dealership sector.
The upgrade reflects a view of a more balanced risk/reward scenario for AutoNation, despite ongoing concerns such as potential earnings downside, high valuations relative to historical levels, and challenges from inventory recovery and OEM margin pressures.
Morgan Stanley's analysis indicates less downside risk to AutoNation's revised price targets, which contributed to the decision to adjust the stock's rating.
While the firm upgraded AutoNation's rating, it maintained an Underweight position on other industry players such as Asbury Automotive Group (NYSE:ABG), Lithia Motors (NYSE:LAD), Penske Automotive Group (NYSE:PAG), and Sonic Automotive (NYSE:SAH). These companies are deemed less well-positioned to capitalize on the current industry themes.
Group 1 Automotive's recent activities have also been highlighted, with a significant focus on their relationship with Toyota (NYSE:TM). GPI's growing Toyota sales, which account for one in every five units sold, are expected to benefit from improving inventory levels and a stronger hybrid mix.
Notably, on February 12th, GPI acquired RRR Automotive Group, a move that is forecasted to bring in $900 million in revenues for FY24 and enhance its Japanese and South Korean OEM exposure.
Additionally, on February 26th, GPI announced the acquisition of two Lexus dealerships in California, anticipated to contribute $350 million in annualized revenues. AutoNation's performance is also noted to be bolstered by its substantial sales of import brands, with Toyota nearly representing a fifth of its FY23 units sold.
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