AutoNation Big Player in Weak Mkt

We reiterate our Hold recommendation for AutoNation, Inc. (AN - Analyst Report), the largest automotive retailer in the U.S., because of difficult industry conditions.

AutoNation has a strong cash position and in 2007, the company repurchased shares and reinvested money in capital expenditures and acquisitions. It is focused on profitability rather than market share and hence its margins are 10 basis points (bps) higher than the nearest competitor. The company targets 100 bps of SG&A improvement over the next three years by consolidating back-office functions.

Although AutoNation continues to improve its margins and is also returning cash to its shareholders through a share buyback program, we are concerned about the company’s exposure to General Motors (GM - Analyst Report) and Ford (F - Analyst Report) as they have been losing market share to their Asian counterparts. To add to that, new vehicle sales continue to face a highly competitive environment.

Thus, we set a six-month target price of $15.00. This target price is based on 11.5x our 2008 EPS estimate. At present, AutoNation’s shares are trading at 12.1x our 2008 EPS estimate of $1.30. Being the largest player in the automotive retail segment, AutoNation has a relatively low debt level. Hence, we believe it should trade at a higher multiple.

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Read the full analyst report on F

Read the full analyst report on AN

Read the full analyst report on GM

Read the full analyst report on F