AutoNation to Review Product Mix

AutoNation (AN - Analyst Report) has revealed that it would reappraise its mix of domestic and foreign brands in the auto inventory as General Motors (GM) switches from a "push production" to "pull production" business model.

GM’s "push production" model was based on pushing out the maximum number of cars the plants could produce in order to meet the fixed costs. However, AutoNation disliked the business model's inefficiencies. Consequently, the Florida-based automotive retailer -- the largest in the U.S. -- has shown little respect for the quality and designs of many domestic brands, including GM.

After emerging from bankruptcy, GM has abandoned it old model and started focusing on the "pull production" model. This implies that the company will establish its production schedule driven solely by consumer demand.

GM’s new model has convinced AutoNation enough to reverse its inventory strategy. At a town hall meeting with GM’s CEO Fritz Henderson, AutoNation CEO Mike Jackson has commented that he will now look forward to include more domestic inventory from the present inventory mix of only one-third domestic and two-thirds basic import and premium luxury import brands.

Meanwhile, both GM and AutoNation are cautious about the U.S. auto industry outlook. Both companies predicted vehicle sales to decline to 10 million units this year from historic highs of 17 million units. Further, Jackson has projected sales of 11.6 million next year followed by gradual recovery to 15 million units in three years.

We recommend the shares of AutoNation as Neutral.