AutoNation Improves On Store Expansion And Rise In Sales

On Dec 5, 2014, we issued an updated research report on AutoNation Inc. AN. This Zacks Rank #2 (Buy) stock had reported a positive surprise of 4.65% in the last reported quarter.

AutoNation posted a 20% rise in earnings per share to 90 cents in the third quarter of 2014 from 75 cents in the same quarter of 2013. Earnings per share also surpassed the Zacks Consensus Estimate of 86 cents.

Meanwhile, the company is poised to benefit from the recovery in the auto market, backed by its optimal brand and market mix as well as a disciplined cost structure. In the first nine months of 2014, new vehicle unit sales increased 9.2% year over year. AutoNation expects its new vehicle sales in the U.S. to be above 17 million units in 2015, banking on its innovative array of products and better access to affordable credit.

AutoNation pursues an aggressive store expansion strategy to boost sales. In Oct 2014, it completed the acquisition of Mercedes-Benz of Bellevue, Barrier Audi, Barrier Porsche and Barrier Volvo in the Seattle-Bellevue, WA market. The expected annual revenue from these stores is approximately $355 million. Over the last 10 quarters, AutoNation has acquired 18 franchises and been awarded 6 new premium luxury franchises by the manufacturers.

Further, AutoNation consistently enhances shareholder value through buybacks. The company repurchased 8 million shares in the first nine months of 2014. Since Jan 1 through Oct 27, 2014, the company has repurchased 8% of its outstanding shares. In Oct 2014, the Board of Directors of the company also authorized the repurchase of up to an additional $250 million of shares.  As of Oct 27, 2014, AutoNation had $281 million remaining under its share repurchase program and around 113 million shares outstanding.

However, rising interest rates and expenditure related to the rebranding strategy are posing challenges to the company. In addition, a series of recalls being announced by automakers might adversely affect the resale value of vehicles that in turn will hurt the used-vehicle revenues of AutoNation. Moreover, strategic investments in digital technology are likely to mar margins.

Other Stocks to Consider

Investors interested in automobile stocks could also consider America's Car-Mart Inc. CRMT, Penske Automotive Group, Inc. PAG and Group 1 Automotive Inc. GPI. While America's Car-Mart sports a Zacks Rank #1 (Strong Buy), Penske Automotive Group and Group 1 Automotive carry a Zacks Rank #2 (Buy).

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