AutoNation Reports Great Start to 2013 with First-Quarter Results


AutoNation reported strong first-quarter results Thursday including an all-time record for EPS from continuing operations of $0.68, up 21% from first quarter 2012. The company continues to execute well in all segments and we see no reason to change our valuation or moat rating. Revenue increased 12% year over year while same-store revenue rose 8.6%. The company’s same-store new vehicle unit volume increased 6.1%, which was roughly in line with the industry’s 6.4% increase.

AutoNation still gained share, however, as total new vehicle retail sales outpaced the industry by increasing 9.2%. As is typical, the revenue increase enabled the company to leverage its fixed costs enough to offset declines in new and used vehicle gross margin, so operating margin came in flat at 4.1%. It is important to remember, however, that the company incurred $6.5 million of non-recurring SG&A expense ($0.03 per share) as part of rebranding its volume brand stores, to the AutoNation brand, as discussed in our Jan. 31 note. Management guided for non-recurring SG&A in the second quarter of $11.5 million which is right in line with its January forecast.

Analysts expect continued strong performance this year and into 2014 since we expect continued increases in new vehicle sales. The industry in our opinion still has room to run as it rebounds from a 2009 bottom of just 10.4 million units sold. We continue to expect 2013 industry new vehicle sales of 15.2 million-15.5 million while AutoNation still expects about mid-15 million. Analysts like that management has slowed its share repurchase activity in favor of making acquisitions.

It appears from comments on the call that sellers have more reasonable asking prices, which enables AutoNation to now pursue M&A over buying back its shares. The company purchased only $2.2 million of its stock in first quarter 2013 compared with $405.4 million in the prior-year quarter and announced Thursday it has agreements to purchase a Honda and Hyundai store in Phoenix as well as a Toyota store in Dallas. These deals represent about $250 million in annual revenue and terms were not disclosed.

Analysts also agree with chairman and CEO Mike Jackson’s comments on the call that he does not expect a price war in the industry because of the weaker yen against the dollar. Jackson is correct to point out that automakers can remain disciplined on incentives because everyone has great product and market share is roughly stable. Analysts have long argued that the old Detroit model of making poorly designed cars while relying on light-trucks is gone and the new and improved U.S. auto industry will instead be a viciously competitive arena where firms constantly shift market share back and forth depending on who has the latest hot models. Furthermore, the Japan 3 are moving to produce more of their vehicles where they sell them, which removes much of the foreign currency exposure from which the Japanese long benefited when the yen was weak before the recession.


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