(AN) AutoNation Remains Neutral

We reiterate our Neutral recommendation on AutoNation Inc. (AN), which is the largest automotive retailer in the U.S. and almost twice the size of its nearest competitor. The company sells 31 different brands of new vehicles, its core brands being  Ford Motor Co. (F), General Motors Company (GM), Chrysler, Toyota Motor Corp. (TM), Nissan Motor Co. Ltd. (NSANY), Honda Motor Co. Ltd. (HMC) and BMW.

AutoNation also offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. It also arranges financing for vehicle purchases through third-party sources.

AutoNation released its 2011 first quarter results on April 26, 2011.  The company reported net income of $70.3 million or $0.46 per share from continuing operations, up 20% year over year from $58.8 million or $0.34 in the year-ago period. Total revenues improved 16.5% to $3.31 billion driven by higher sales of both new and used vehicles.

The company is expected to show more improvement in the near future given the number of projects the company has in hand at present. The company has 16 major facility projects waiting for completion in 2011. It includes the addition of six new stores and the upgrade of 10 existing stores.

In addition, AutoNation continues to improve margins by altering its product mix and increasing its focus on selling parts and services, such as insurance, finance and aftermarket product services.

Another important aspect is the aggressive share repurchases policy of the company. In the first quarter of 2011, the company repurchased 1.8 million shares of its common stock for $58.8 million at an average purchase price of $32.84. As of March 31, 2011, $174.4 million worth of shares remained available for repurchase under the share repurchase program approved by its Board of Directors.

However, despite a satisfactory performance by the company in the last quarter, one out of 10 analysts covering the stock for the upcoming quarter has revised his earnings estimate downward in the past 30 days.

The biggest threat to AutoNation’s business is considered to be rising interest rates. A significant amount of the company’s debt is variably-rated , which will rise with higher short-term rates.

Secondly, the company will face some short term supply constraint from Japan due to the natural disaster in March, 2011.

AUTONATION INC (AN): Free Stock Analysis Report

FORD MOTOR CO (F): Free Stock Analysis Report

GENERAL MOTORS (GM): Free Stock Analysis Report

HONDA MOTOR (HMC): Free Stock Analysis Report

NISSAN ADR (NSANY): Free Stock Analysis Report

TOYOTA MOTOR CP (TM): Free Stock Analysis Report

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