AutoNation Upgraded to Outperform

We have upgraded our long-term recommendation (6+ months) on the shares of AutoNation Inc. (AN) from Neutral to Outperform. This is based on its improved results and recent acquisitions.

In the second quarter of 2010, AutoNation posted a 36% increase in profits (adjusted) to $62 million or 38 cents per share from $50 million or 28 cents per share in the prior-year quarter. With this, the automotive retailer has inched past the Zacks Consensus Estimate of 36 cents per share.

Revenues in the quarter escalated 19% to $3.1 billion, driven by a marked 25% improvement in the new and used vehicle revenues. It was close to the Zacks Consensus Estimate of $3 billion. Operating income increased to $125.9 million from $100.9 million a year ago.

The company continues to surpass the industry in terms of growth in new vehicle unit sales. The increase in new vehicle unit sales was higher than the industry sales increase by 4 percentage points and 8 percentage points in the first quarter and second quarter of the year, respectively.

We appreciate the company’s aggressive share repurchase policy. In 2009, the company repurchased 7.7 million shares for $136.1 million, up from $54.1 million worth of shares repurchased in the prior year.

In the first half of 2010, the company repurchased another 23 million shares of common stock for an aggregate purchase price of $451.6 million, reflecting an average purchase price of $19.63. On July 20, 2010, the board of directors of the company authorized the repurchase of up to an additional $250 million of its common stock.

We are optimistic about the company’s recently completed acquisition of Hyundai of Seattle as well as of Toyota Mall and Hyundai Mall, both in Georgia, that are expected to be completed in the third quarter of 2010.

Among these, Toyota Mall of Georgia, which includes Scion, is one of the largest Toyota dealerships in the U.S. The annual revenue run rate for all these acquisitions is estimated at $200 million.

AutoNation, a Zacks #1 Rank (Strong Buy) stock, is the largest automotive retailer in the U.S. and is about twice the size of its nearest competitor. As of June 30, 2010, the company owned and operated 249 new vehicle franchises from 204 dealerships located in major metropolitan markets in 15 states.

The retailer sells 33 different brands of new vehicles manufactured by Ford Motor (F), General Motors, Chrysler, Toyota Motor (TM), Nissan Motor (NSANY), Honda Motor (HMC) and BMW. These core brands represented 94% of the sales in the first half of 2010.

AUTONATION INC (AN): Free Stock Analysis Report

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