Will AutoNation Still Come Out Smelling Like a Rose?

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When I was considering buying my F-150 pickup last year, the first place I headed was my local Ford  (NYSE: F  )  dealer. I could have gone to a few others around me, but the one I chose was closest, so I went there. And bought. It really didn't matter to me what the place was called because I knew it as "the Ford dealership." and for all I cared it could've been called "Bob's Cars" or simply "Ford," even.

National auto dealership AutoNation (NYSE: AN  ) thinks differently. It believes having a unified corporate presence will be a defining characteristic in pushing sales at its network of dealers, so it's dispensing with all the local dealership names and advertising itself based on the corporate brand. I think it's a lot of work and effort (and a little money) for nothing.

Such a deal!
AutoNation is the biggest U.S. chain of dealerships, with 210 new-vehicle franchises accounting for 180 stores, followed by Penske Auto Group (NYSE: PAG  ) , with about 170 in the U.S. (It has another 173 located outside the States.)

Total revenue this quarter jumped 13% to $4.2 billion as new vehicle sales jumped 17% on a same-store basis. Profits surged 20% from the year-ago period, and it expects industry sales to continue marching higher until they hit 15.5 million cars, a 7% increase from 2012. Underscoring the good times in auto sales, Penske saw sales jump 17% on an 11.7% rise in comps.

New car sales data for January is due out today, and auto analysts are pretty much in agreement with the car dealer believing they'll hit a seasonally adjusted run rate of 15.3 million cars. If correct, it would mark the best January sales month in five years. Ford is expected to post a better than 20% gain in sales, and General Motors (NYSE: GM  ) figures to be up 15%, but there are caution lights flashing.

Although January sales are strong -- up 14.5% from last year -- they're down almost 23% from December. While that month's sales may have been helped by folks buying cars to replace those lost to Hurricane Sandy, cars dealers still have to contend with elevated unemployment levels, falling consumer confidence, and an economy that experienced a contraction for the first time in three years in the fourth quarter. Those are some pretty big headwinds that may see auto sales play out differently as the year progresses.

A rose is a rose
One way AutoNation plans on improving its chances is by launching this national branding plan. The name change will affect 82% of the vehicles it sold last year for Ford, GM, Toyota, and Nissan. What won't change are the names of its luxury nameplate dealers, like Mercedes and BMW. Apparently there's still a lot of cachet left in those cars, as opposed to the more commoditized Fords, GMs, and Toyotas, from which it had to get the OK from before it could proceed. 

The problem with the idea is that even though AutoNation is something of a national company, selling cars in 15 states, cars are still sold locally. Penske, for example, is represented in 17 states and maintains its local dealership names, seemingly believing that the name of the car brand is more important than the Penske name, even though Roger Penske's racing history would be a draw. Thus you have Audi Fairfield in Connecticut, Central Florida Toyota, and Hudson Nissan in Jersey City, N.J.

Conversely, CarMax (NYSE: KMX  ) , which is the nation's largest used car dealer, uses a corporate branding program, but I'd argue that's a more important distinction for it. Shopping for used cars is fraught with risk -- there's a reason used car salesmen have a reputation -- so giving the consumer the confidence that you're buying from a national brand lowers that risk. Like buying a bottle of soda from Coke or a sneaker from Nike, there is a value that can be placed on a brand and something to be said for the expected quality that comes with it. With new cars, however, it's arguably the manufacturer and not the dealer where those expectations arise.

Rank opportunity
Although the branding initiative will cost AutoNation only $18 million, it seems much ado about nothing. Part of the rationale is that it will help in Google search rankings, as there will be just one name instead of 15 names to hit on. But that's if "AutoNation" is what people are searching for. If I pop in "Ford dealer" into the search engine, which I believe is how most people search for cars, it returns all the dealers in my vicinity, regardless of what they're called.

Moreover, as management acknowledges, taking down a dealership name that may have been in business for decades and replacing it with a corporate brand many people have likely never heard of before itself carries great risk. They'll be spending more advertising money to support the rebranding effort, but in the end I think this amounts to little more than ego massaging and not doing anything that leads to more sales.

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford's stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

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