Earnings Preview: AutoNation

AutoNation Inc. ( AN - Analyst Report ) would release its results for the second quarter of 2012 before the market opens on July 19. The automotive retailer posted a profit of 56 cents per share in the first quarter of the year, surpassing the Zacks Consensus Estimate by 3 cents. In the upcoming quarter, the Zacks Consensus Estimate for the company is a profit of 59 cents per share, reflecting annualized estimated growth of 21.02%.

With respect to earnings surprise, the company has outperformed the Zacks Consensus Estimate in three of the trailing four quarters and was in line in one of the quarters. With this, the company has delivered an average earnings surprise of 5.39%.

The Zacks Consensus Estimates for full-year 2012 is $2.34, respectively. The upside potential of the second quarter and full-year estimates, essentially a proxy for future earnings surprises, would be about 1.70% and 0.43%, respectively.

First Quarter Review

AutoNation recorded a 4.6% rise in profits to $73.5 million in the quarter compared with $70.3 million in the corresponding quarter of last year. Revenues went up 10.4% to $3.7 billion, driven by an improvement in retail new vehicle sales. They were higher than the Zacks Consensus Estimate of $3.6 billion.

Revenues from New Vehicle sales went up 11.7% to $1.9 billion on a 10.4% rise in unit sales to 61,516 vehicles. Used vehicle (retail and wholesale) revenues grew 10.5% to $918.8 million on a 9.6% increase in unit sales to 46,116 vehicles. Parts and service business saw a 5.2% increase in revenues to $599.9 million whereas Finance and Insurance business recorded a 17.6% increase in revenues to $130.2 million.

The company expects new product launches, replacement demand and robust consumer credit will boost sales in 2012. It continues to expect full year U.S. industry new vehicle sales to grow 13% to mid-14 million units.

Estimate Revisions Trend

Estimates for the second quarter have remained almost stable over the past 30 days. The consensus has increased marginally by 1 cent from 58 cents over the past 60 days.

Agreement of Estimate Revisions

Over the last 30 days, two out of ten analysts covering the stock have revised the estimates upward while none moved it downward. The upward pressure in estimates can be attributable to better retail sales trends. Over the last seven days, none of the analysts made any estimate revisions for the quarter.

Estimates for 2012 depict the same trend. Two out of eleven analysts covering the stock have revised the estimates upward while none moved it downward over the last 30 days. However, there was no downward or upward revision in annual estimates over the last week.

Magnitude of Estimate Revisions

Following the first quarter earnings release, estimates for the second quarter and full-year 2012 have been raised by 2 cents to 58 cents and 6 cents to $2.33, respectively. This can be attributable to AutoNation’s higher profit during the quarter, better performance of the segments and share repurchase strategy.

Our Take

Headquartered in Fort Lauderdale, Florida, AutoNation is the largest automotive retailer in the U.S. The company owns and operates about 260 new vehicle franchises that sell 32 brands located in the major metropolitan markets in 15 states.

The company offers an array of automotive products and services, ranging from new vehicles, used vehicles, vehicle maintenance and repair services, vehicle parts, vehicle protection products to other aftermarket products. Its main competitors include Penske Automotive Group Inc. ( PAG - Analyst Report ) , Group 1 Automotive Inc. ( GPI - Snapshot Report ) and Sonic Automotive Inc. ( SAH - Snapshot Report ) .

Recovery in auto sales owing to improved customer confidence and introduction of new products will boost the company’s earnings. In addition, revamped models of Civic and Accord as well as stabilization of inventory are expected to help AutoNation outperform the growth in U.S. light vehicle market.

The company recorded a solid 31% rise in new vehicle sales in the second quarter of 2012. Sales in the Domestic segment rose 18%, Import segment jumped 47% and Premium Luxury segment went up 18% during the quarter. However, the company’s sales were adversely affected by higher fuel prices and lower availability of sub prime loans.

Currently, AutoNation retains a Zacks #2 Rank, which translates into a short-term (1 to 3 months) Buy rating and we have a long-term (more than 6 months) Neutral recommendation on the stock.