Earnings Preview for AutoNation

AutoNation (AN - Analyst Report) will release its sales and earnings results for the third quarter ended Sep 30, 2009, on Thursday, Oct 29, 2009, before the market opens. The Florida-based automotive retailer reported earnings of $55 million or 31 cents per share in the second quarter of 2009. This was above the Zacks Consensus Estimate of 24 cents per share despite a difficult industry environment. The company believed its cost reduction initiatives, lower interest expense, disciplined operating model and inventory management helped it to maintain the profits during the quarter. 

However, earnings were essentially flat compared to the year-ago level of $56 million or 31 cents per share. For the quarter, Zacks Consensus Estimate for AutoNation is 32 cents per share, reflecting a meager improvement from recorded earnings in the previous quarter. 

AutoNation is the largest automotive retailer in the U.S. and is about twice the size of its nearest competitor. As of Mar 31, 2009, the company owned and operated 296 new vehicle franchises from 228 dealerships located in major metropolitan markets in 15 states. The Sunbelt region generated 75% (with 50% in Florida and California). The company’s core brands, which includes Ford (F - Analyst Report), General Motors, Chrysler, Toyota (TM - Snapshot Report), Nissan (NSANY - Analyst Report), Honda (HMC - Analyst Report) and BMW represents 96% of the sales. 

AutoNation has improved 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. Further, the company has a capital allocation strategy devoted to debt reduction. However, the auto retailer is likely to suffer from its high exposure to bankrupt automakers, General Motors and Chrysler, as they represent 35% of the company’s new vehicle sales. 

Going forward, AutoNation expects the U.S. “Cash for Clunkers” cash incentive program for the fuel-efficient vehicles to stimulate new vehicle sales. The dealer greatly benefited from the Clunkers program, introduced by the U.S. Government in late July. It has sold 13,000 vehicles under the program, ended Aug 24. 

Consequently, AutoNation intends to increase its inventory of vehicles in a disciplined manner to meet demand. In early September, the retailer has increased its fourth quarter vehicle orders by 50% quarter-over-quarter. Thus, we recommend the shares of AutoNation as Outperform with a target price of $22.00.