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AutoNation Inc. (AN - Free Report) posted a solid 35% jump in profits for the second quarter of 2012, which helped this automotive retailer reach its 52-week high of $43.72. With a stronger environment for new vehicle sales and a long-term earnings growth projection of 16.5%, this Zacks #1 Rank (Strong Buy) offers a lucrative opportunity for growth-seeking investors.

Impressive Quarter

On July 19, AutoNation reported adjusted earnings per share of 66 cents for the second quarter of 2012, outpacing the year-ago level of 49 cents by 35% as well as the Zacks Consensus Estimate of 60 cents by 10%.

Revenues grew 17% to $3.9 billion driven by a growth in new vehicle unit sales of 29%, which significantly outperformed the industry growth of 15%. On a same-store basis, new vehicle sales went up 29% to 66,828 units during the quarter.

The selling rate in the quarter rose 16% to 14.1 million units. Management expects the retail sales environment to continue to improve, driven by accelerated product launches, replacement demand and robust consumer credit. It anticipates that industry new vehicle sales will reach mid-14 million units by the end of 2012.

Earnings Estimates Moving Higher

AutoNation saw strong upward revisions for both fiscal 2012 and 2013 over the last 60 days. For 2012, the Zacks Consensus Estimate advanced by 6.0% to $2.48. For 2013, the Zacks Consensus Estimate went up 6.1% to $2.80. The outlooks for 2012 and 2013 reflect double-digit annualized growth of 27.8% and 12.9%, respectively.

Valuation is Expensive but Justified

Valuation of AutoNation looks expensive, which is reflected in its PEG ratio of 1.03. The stock is currently trading at a forward P/E of 17.0x, a premium of 44.0% to the peer group average of 11.8x. The price-to-book of 3.4x is at a premium of 79.0% compared to the peer group average of 1.9x.

However, the company has a 1-year ROE of 16.9% versus the peer group average of 16.6%. The expensive valuation is justified given the company’s strong growth in each of its business areas and continuous improvement in the retail sales environment.

Chart Looks Stable

The stock has been outperforming its 50-day and 200-day moving averages since July.

Incorporated in 1991 and headquartered in Fort Lauderdale, Florida, AutoNation is the largest automotive retailer in the U.S. As of June 30, 2012, the company owned and operated 260 new vehicle franchises and 215 stores located in major metropolitan markets in 15 states. The $5.1 billion company sells 32 different brands of new vehicles, representing automakers such as Ford Motor Co. (F), General Motors Company (GM) and Toyota Motor Corp. (TM), among others.

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