AutoNation Predicts Gloomy 2010

AutoNation (AN - Analyst Report) has sketched its industry outlook, revealing a gloomy 2010 preceding an improvement in the years following. The company stated that it anticipates a marginal rise in industry sales to 11 million cars and trucks from the current-year rate of 10 million vehicles. This was in stark contrast to an annual rate of more than 16 million vehicles ticked earlier this decade.

AutoNation blamed tight credit for pulling down sales this year. However, sales will hit bottom in 2009. Many banks have kept their credit standards extremely high for car loans, which is depressing the industry sales despite continuous efforts taken by the government to ease credit standards.

Further, job loss and stability in housing prices are also an issue. Thus, the Richmond, Virginia-based automotive retailer -- the largest in the U.S. -- expects the industry to recoup sales gradually by 2011 and beyond.

In the third quarter, the government stimulus program for fuel-efficient vehicles, "Cash for Clunkers," benefited AutoNation. The company has posted a 44% rise in profits to $65 million or 36 cents per share from $44 million or 25 cents per share in the third quarter of 2008. The Clunkers program aided the retailer’s results by 7 cents per share.

Total segment operating income improved to $111 million from an operating loss of $1.6 billion a year ago. However, revenue for the quarter slipped 13% to $2.9 billion, triggered by lower vehicle sales volumes.

Therefore, the revenue forecast places AutoNation in a challenging market scenario. As such, we maintain our Neutral recommendation for the stock.