AutoNation, Inc. (AN) reported its first quarter earnings for 2010 on April 22, 2010, exactly meeting the Zacks Consensus Estimate. The market reacted positively, with its share price rising in the subsequent 3 days.
However, the share price started descending from the fourth day of the earnings release. This can be attributable to the company’s weak business with some of its core brands owners, such as General Motors (MTLQQ) and Chrysler. Toyota Motor’s (TM) safety recalls have also been taking a toll on the company’s near-term outlook.
Nevertheless, analysts were optimistic about the company given the strong results. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both short-term and the long-term outlook for the stock.
Earnings Report Review
AutoNation showed a 55% increase in profits on a revenue growth of 19%. The new and used retail vehicle revenues recorded marked improvements of 24% and 23%, respectively. This translated into revenue per new vehicle of $32,253 (an increase of 4% from the year-ago level) and revenue per used vehicle of $17,102 (an increase of 10.5%). Despite an improvement in income, the company’s cash flow from operations was nearly cut in half due to a significant increase in inventory.
(Read our full coverage on this earnings report: AutoNation Matches Expectations)
Earnings Estimate Revisions – Overview
Estimates have improved since the earnings release, implying analysts’ optimism about the stock. However, turbulent share price movement suggests that investors should look before they leap to own AN shares. Let’s move into the earnings estimate details.
Agreement of Analysts
The table below shows a strong agreement among the analysts regarding the outlook of AutoNation’s earnings. Out of 10 analysts covering the stock, 8 analysts have revised upward their estimates for 2010 and none has revised downward. Looking toward 2011, the trend is more or less similar. There were 7 analysts revising the estimate upward while one moved in a downward direction. This impressive trend in estimate revisions promises a consistent stream of earnings.
Magnitude of Estimate Revisions
Earnings estimates for 2010 were raised by 6 cents from $1.38 to $1.44 since the earnings announcement. Analysts expressed a similar level of confidence about 2011. They have raised the estimates by 7 cents from $1.59 to $1.66 for the year. This looks promising again as analysts continue to value the stock at a stable premium.
AutoNation in Neutral Lane
AutoNation generates a significant amount of revenues (30% in the first quarter of 2010) from Florida through its 54 dealerships. Consequently, a downturn in the state’s economy has been affecting the company since mid-2008. However, the company has begun witnessing revenue growth in the state since the fourth quarter of 2009. Revenues in the state grew 30% in the first quarter of 2010. This is definitely very good news.
However, GM and Chrysler represent 35% of AutoNation’s new vehicle sales. Together, they have closed down 13 dealership stores (GM – 6, Chrysler – 7). Since the beginning of the year, the recall affected over 55% of the company’s Toyota inventory. This primarily led to an increase in expenditure by $358 million in the company’s inventory. Consequently, the company’s operating cash flow almost halved despite an increase in net income.
These have led us to reiterate our Zacks #3 Rank for the stock, which translates to a short-term Hold recommendation. We also maintain our long-term recommendation on the stock as Neutral.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “AN”
Read the full analyst report on “MTLQQ”
Read the full analyst report on “TM”
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