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On Jun 12, we maintained our Neutral recommendation on AutoNation Inc. (AN - Analyst Report) based on its optimal brand and market mix, which is driving the sales of new vehicles. Further, the company focuses on expanding its dealership network by investing in existing stores and service centers.

These also let AutoNation post improved result in the first quarter of 2013. However, we are concerned about the rising interest rates and depleted cash balance of the company.

Why the Reiteration?

On Apr 18, AutoNation posted a 21.4% rise in earnings per share to 68 cents in the first quarter of 2013 from 56 cents in the same quarter of 2012, topping the Zacks Consensus Estimate by 5 cents.

Revenues increased 10.8% to $4.1 billion, almost in line with the Zacks Consensus Estimate of $4.0 billion. The revenue growth was mainly attributable to strong new vehicle sales during the quarter.

Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 increased 2.4% to $2.97 per share. Meanwhile, the Zacks Consensus Estimate for 2014 increased 2.5% to $3.33 per share.

AutoNation is set to witness higher margins due to its product mix, focus on selling parts and services, such as insurance, finance and aftermarket product services. In addition, the company follows an aggressive share repurchase policy. In the first quarter of 2013, AutoNation repurchased 0.1 million shares for $2.2 million.

However, we are concerned about the rising interest rates as a significant amount of AutoNation’s debt is taken at a variable rate. Moreover, the performance of the company will be adversely affected by a shift in mix away from premium luxury and domestic vehicles to import vehicles with lower average selling prices.

Other Stocks to Consider

Currently, AutoNation retains a Zacks Rank #2 (Buy). Other stocks that are performing well in the same industry where AutoNation operates include Lithia Motors Inc. (LAD - Snapshot Report), Asbury Automotive Group, Inc. (ABG - Snapshot Report) and Group 1 Automotive Inc. (GPI - Snapshot Report). Asbury Automotive is a Zacks Rank #1 (Strong Buy) stock while Group 1 and Lithia carries Zacks Rank #2 (Buy).

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