On surface level, car dealership AutoNation (AN) seems an unusually risky wager. After all, the Federal Reserve’s ongoing battle with historically high inflation puts a crimp on high-ticket items. Due to the associated rise in borrowing costs, the average consumer faces an affordability crisis. Thus, AN stock doesn’t seem like a particularly smart investment at this juncture.

However, recent activity in the derivatives market would suggest otherwise. Following the close of the Feb. 17 session, AN stock represented one of the highlights of Barchart.com’s screener for unusual stock options volume. Specifically, volume reached 8,585 contracts against an open interest reading of 29,527. Also, the delta between the Friday session volume compared to the one-month trailing volume came out to 426.69%.

Drilling into the details, call volume hit 5,494 contracts while put volume reached 3,091. Of course, the leaning toward a bullish framework centers on AutoNation’s outstanding fourth-quarter earnings report.

According to the AP, the company reported a Q4 profit of $286.4 million. On a per-share basis, AutoNation declared a profit of $5.72. Adjusted for non-recurring costs, earnings per share came out to $6.37. Best of all, this stat beat out Wall Street’s consensus EPS target calling for $5.89.

On the top line, the auto retailer posted sales of $6.7 billion. This too beat out analysts’ consensus expectations, which anticipated revenue of $6.38 billion. At the time of the report, AP noted that AN stock gained 32% since the beginning of the new year.

After investors digested the positive earnings print, AN stock closed the Friday session up 11.35%. As a result, shares gained nearly 47% on a year-to-date basis. Unsurprisingly, some market experts don’t believe this resurgence in the broader auto retail market is sustainable. Essentially, the sector has gotten ahead of itself.

Still, it’s quite possible that AN stock can continue moving the rally forward.

Rising Vehicle Age Bodes Well for AN Stock

Drilling into the details, market observers not spooked by the overheated-sector argument saw several reasons for optimism. Primarily, Q4 unit sales came out to 127,682. In contrast, Wall Street analysts anticipated a haul of 126,596.3 units.

In addition, AutoNation posted a revenue-per-vehicle retailed in the new vehicle segment at $52,394. This compared favorably to analysts’ expectations of $51,043.50. Even the same metric for the used-car segment managed to beat out estimates, $29,780 against $29,287.80.

Finally, for the parts and service segment, AutoNation delivered revenue of $1.03 billion, pipping the consensus target calling for $1.02 billion. Further, this tally represented a 7% year-over-year lift. Therefore, no matter where one turns, the company justified corralling strong investor sentiment. This was no cheap earnings beat against artificially lowered standards.

However, the fundamental reason that may be undergirding the strong showing for AN stock may focus on rising vehicle age. According to The Wall Street Journal, the average age of vehicles on U.S. roadways hit a record 12.2 years. That’s significant because modern cars nowadays last around 12 years. Therefore, it’s reasonable to assume that many vehicles face an inevitable replacement.

Put another way, it’s not the consumer making the choice to purchase or abstain; rather, the car itself will primarily determine the outcome. Outside of mechanical realities of wear and tear, the consumer would probably nurse their rides indefinitely, especially under this environment. Again, with the Fed tightening the money supply, now’s not a great time to buy a car.

What’s more, most car buyers – we’re talking nearly 84% of transactions for new cars – used financing. Obviously, then, higher borrowing costs would disincentivize such a pricey acquisition.

Unless, of course, consumers were forced to buy their new (or new-to-them) rides – then the equation changes. But that’s exactly the bullish narrative for AN stock. It’s the aging car, not the consumer that’s driving the purchasing decision.

Other Facts Weigh In

Further, AutoNation has help from outside fundamental catalysts. Predominantly, fears of COVID-19 have faded dramatically since the early days of the pandemic. Therefore, people are much more willing to socialize and to travel. Organically, this dynamic should boost traffic volume levels, thus increasing wear and tear and boding cynically well for AN stock.

Moreover, workplace normalization should be a massive catalyst for AN stock. With enterprises beginning to question the viability of remote operations, the full return of the morning commute would easily wear down vehicles. By logical deduction, AutoNation will likely continue attracting demand, making AN a surprisingly relevant market idea.

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