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Analyst Blog

On Aug 28, 2014, we issued an updated research report on AutoNation Inc. (AN - Analyst Report). This Zacks Rank #3 (Hold) stock reported a 4.6% negative earnings surprise in the last reported quarter.

AutoNation posted a 13.7% rise in earnings per share to 83 cents in the second quarter of 2014 from 73 cents in the same quarter of 2013. However, earnings per share missed the Zacks Consensus Estimate of 87 cents.

Meanwhile, the company is positioned to benefit from the recovery in the auto market, backed by its optimal brand and market mix as well as a disciplined cost structure. In the first half of 2014, the company’s new vehicle unit sales increased 8.7% year over year. AutoNation expects its new vehicle sales in the U.S. to increase 3–5% to above 16 million units in 2014, banking on its innovative array of products and access to affordable credit.

AutoNation pursues an aggressive store expansion strategy to boost sales. In Jul 2014, AutoNation completed the acquisition of Roundtree Chrysler Dodge Jeep Ram in the Mobile, Alabama market. This marks the third store in the Mobile market and will support the company’s strategy of enhancing its presence in existing markets. This is expected to boost the company’s revenues as the store is expected to generate annual revenues of $95 million.

Further, AutoNation consistently enhances shareholders’ value through buybacks. The company repurchased 3.5 million shares in the first half of 2014. As of Jul 16, 2014, AutoNation had around $336 million worth of repurchase authorization remaining and 119 million shares outstanding.

However, rising interest rates and expenditure related to the rebranding strategy are posing challenges to the company. In addition, a series of recalls being announced by automakers might adversely affect the resale value of vehicles, which will in turn hurt the used vehicle revenues of AutoNation. Moreover, strategic investments in digital technology are likely to mar margins.

Other Stocks to Consider

Investors interested in automobile stocks could also consider Lithia Motors Inc. (LAD - Snapshot Report), Penske Automotive Group, Inc. (PAG - Analyst Report) and Rush Enterprises, Inc. (RUSHA - Snapshot Report). While Lithia Motors sports a Zacks Rank #1 (Strong Buy), Penske Automotive and Rush Enterprises carry a Zacks Rank #2 (Buy).

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