Morgan Stanley cuts AutoNation, Group 1 as dealer headwinds mount

Investing.com -- Morgan Stanley cut its ratings on AutoNation and Group 1 Automotive, citing negative earnings revisions, higher rates and oil prices, and regulatory and technological overhangs facing franchise auto dealers.

Analysts led by Daniela Haigian downgraded AutoNation to Equal-weight from Overweight and cut its price target to $175 from $250. They also lowered Group 1 to Underweight from Equal-weight, with a target of $232 versus $300, implying about 7% downside.

The analysts said waves from AutoNation’s guidance cut at its Laguna Conference "continue to ripple through the market." Morgan Stanley cut third-quarter and fiscal 2027 EPS estimates across franchise dealers by about 7% and 5% on average, trimmed price targets by 18% on average, and lowered implied multiples by 1.2 turns. It said it expects Street estimates to move lower as third-quarter results come in.

For AutoNation, the team said the company’s commentary points to a roughly 10% quarter-over-quarter decline in new-vehicle gross profit per unit, moderating parts and service growth as consumers defer elective work, and softer finance and insurance profitability.

That suggests pressure "is extending beyond vehicle-margin normalization into the higher-margin ancillary businesses," the analysts wrote. The bank cut AutoNation’s third-quarter and 2027 EPS by 8% and 6%, leaving it 9% and 6% below consensus.

The analysts said they remain favorable on AutoNation’s management and long-term earnings potential, but would need to see stabilization in new-vehicle profit per unit and a less negative macro backdrop before turning more constructive.

On Group 1, Morgan Stanley said company-specific execution risk, including U.S. rebranding disruption, used-vehicle sourcing challenges and the upcoming Hennessy integration, now "collides with a more challenging industry backdrop." It cut third-quarter and 2027 EPS by 11% and 6%, which is 13% and 8% below consensus.

Beyond near-term softness, the bank flagged structural risks. FTC fee disclosure rules have reduced pricing opacity, while agentic AI could make cross-retailer price comparison frictionless, threatening high-margin parts, service, finance and insurance. Price-to-earnings multiples for the group have fallen about 3.5 turns, excluding Penske Automotive.

Morgan Stanley reiterated Carvana as its favorite idea in auto retail, saying its vertically integrated, digital model is better positioned for an environment where "price, cost and execution increasingly drive share."

Original Article

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