We have retained a Neutral recommendation on AutoNation, Inc. ( ( AN - Analyst Report ) ). We appreciate the company’s optimal brand and market mix, which is pushing up new vehicle sales as the market revives. However, we are concerned about tough competition and rising interest rates faced by the company.

In the second quarter of the year, AutoNation reported an 18% rise in profits to $73 million or 49 cents per share from $62 million or 38 cents per share in the prior-year quarter.

With this, the automotive retailer has inched past the Zacks Consensus Estimate by 2 cents per share. The second quarter profits excluded an adjustment related to debt-refinancing costs of $12 million (after-tax) or 7 cents per share.

Revenues in the quarter scaled up 7.5% to $3.34 billion, driven by higher retail new and used vehicle average selling prices. However, it was lower than the Zacks Consensus Estimate of $3.40 billion.

Gross profit rose 10% to $583 million from $529 million in the year-ago period due to an increase in retail new and used vehicle gross profit as well as an increase in finance and insurance gross profit. It was favorably impacted by $1.4 million related to incentives on premium luxury vehicles previously sold.

Gross profit per new vehicle retailed increased $539 or 25.7% to $2,638 while gross profit per used vehicle retailed rose $174 or 10.7% to $1,800 from the year-ago levels. Meanwhile, operating profit increased to $144.4 million from $126.0 million in the year-ago quarter.

AutoNation follows an aggressive share repurchase policy. In the second quarter of 2011, the company has repurchased 3.4 million shares of its common stock for $110.9 million, reflecting an average purchase price of $32.62. This has brought the total number of shares repurchased to 5.1 million for $169.7 million for the first half of the year.

AutoNation is the largest automotive retailer in the U.S. and is about twice the size of its nearest competitor. As of June 30, 2011, it owns and operates 254 new vehicle franchises and 213 stores located in major metropolitan markets in 15 states, with about 75% of sales being focused on the Sunbelt region of the U.S. (with 50% in Florida and California).

The company sells 32 different brands of new vehicles, its core brands being Ford Motor ( ( F - Analyst Report ) ), General Motors ( ( GM - Analyst Report ) ), Chrysler, Toyota Motor( ( TM - Analyst Report ) ), Nissan Motor ( ( NSANY ) ), Honda Motor ( ( HMC - Analyst Report ) ) and BMW. These core brands represented 90% of new vehicle sales as of June 30, 2011.