Autonation Heavily Exposed to Lag

We expect Autonation, Inc. (AN - Analyst Report), the largest automotive retailer in the U.S., to be hurt by a continuing weak new car market. The company is disproportionately exposed to Florida and California, states that will be hit the most by a slowing car market. As a result, we rate the shares a Sell with a target of $9.

New vehicle sales continue to face a highly competitive environment, and margins for new cars are likely to fall. We are concerned about AutoNation s exposure to General Motors (GM) and Ford (F - Analyst Report) as they represent 35% of the company’s new vehicle sales.

The two automakers have been losing market share to their Asian counterparts. Sales could fall further due to a weak economy. The company has implemented a policy of purchasing less from General Motors and Ford in order to tilt its car mix towards luxury/import brands. However, AutoNation has a strong cash position.

The company continues to improve margins by altering its product mix and increasing its focus on selling parts as well as services such as insurance, finance and aftermarket product services in order to improve profitability. AutoNation is focused on profitability rather than market share.

However, the success of the company’s acquisition strategy is a major risk. Its revolving credit facility restricts additional indebtedness, which will slow the pace of acquisitions. Autonation spends about $100 million per year on acquisitions, mostly earmarked for increasing the exposure of luxury and import brands.

Read the full analyst report on AN

Read the full analyst report on GM

Read the full analyst report on F