AutoNation Seeks New Credit Line

AutoNation Inc. (AN - Analyst Report) recently announced that it is in discussion with its lenders for a new credit agreement. The new credit agreement, if approved, will replace the company’s existing credit agreement, including a term loan and revolving credit line due 2012 and 2014, respectively.

The proposed credit agreement will enable the company to obtain almost $1.5 billion in new credit, reflecting an increase of about $328 million over the company's existing credit agreement. The funds will be accessible through term loans and revolving credit lines.

AutoNation is the largest automotive retailer in the U.S. and is about twice the size of its nearest competitor. As of September 30, 2011, the company owned and operated 257 new vehicle franchises located in major metropolitan markets across 15 states, with about 75% of sales being focused on the Sunbelt region of the U.S. (with 50% in Florida and California).

In the last reported quarter, AutoNation posted a profit of 48 cents compared with 39 cents in the third quarter of 2010. Total revenue increased 7% to $3.5 billion, driven mainly by higher selling prices for new and used vehicles.

Gross profit rose 5% to $575 million from $545 million in the year-ago period. The increase was attributable to an increase in retail new vehicle gross profit, as well as a rise in finance and insurance gross profit. Operating profit was $144.1 million, up 19% from $120.9 million a year ago.

AutoNation’s efforts to expand its dealer network by investing in existing stores and service centers will help it to outgrow its peers. The company believes new vehicle sales will continue to improve based on the long-term recovery of the U.S.market.

However, tough competition from companies like Penske Automotive Group, Inc. (PAG - Analyst Report) and Sonic Automotive Inc. (SAH - Snapshot Report) along with rising interest rates are some of the challenges faced by the company. As a result, the shares of the company currently retain a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating and we reiterate our long-term recommendation of Neutral for the long term (more than 6 months).