Scouring for Dents in AutoNation

 | Oct 16, 2012 | 3:00 PM EDT  | Comments
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Shares of AutoNation (AN) have been driving higher all year, powered by increasing vehicle sales and aggressive share buybacks. But with the stock within 2 points of an all-time high, is now the time to get in, or is the company about to skid off the road?

AutoNation has been the perfect leveraged bet for playing the trend of improving auto sales. As these sales improved, the company revved up the stock-buyback machine. Hedge fund investors noticed the double whammy and went along for the ride -- 38% for 2012. Investors in CarMax (KMX) haven't been as lucky; that stock is up just 3 points for the year. Meanwhile, investors in General Motors (GM) and Ford (F) are in need of a tow truck.

At the beginning of the year, analysts were estimating auto sales would reach 13 million units, and investors jumped into the automakers. But AutoNation provided the best ride. As of September, the consensus estimate is 14.96 million units.

For the June quarter, AutoNation reported earnings of $0.66 per share, $0.07 better than the consensus estimate. Revenue rose 17% to $3.9 billion. Operating income rose 13.7% to $164.2 million. New-car sales were up 25.7% to $2.2 billion. Used-car sales were up 6.7%. Insurance and financing revenue rose 24%. Even parts-and-service revenue rose 5%. During the quarter, the company sold 113,000 cars and made a profit of $2,172 per new car and $1,624 per used car.

During the second quarter, the company spent $126 million to repurchase 3.7 million shares. The board of directors authorized management to repurchase an additional $250 million worth of stock. With the increased authorization, AutoNation has $368 million of repurchase firepower.

It's hard to find dings in this story, but if you look close enough you can find some. Year-to-date, new-car sales are up 19.5% and used-car sales are up 8.7%, but gross profit per new vehicle is down 10.7%. Cash flow from operations is also declining. That last metric has declined from $125.1 million to $119.5 million in the last six months. I think competition is taking a toll. Although sales volume is up, pricing and cash flow is down.  I think management knows this, and that's why they increased the share buyback. In my view, investors in AutoNation are about to hit a rough patch.

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