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AutoNation a Strong Play on the Industry's Success

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With car sales in the United States looking healthier and healthier, the various outlets within the industry should benefit as well. At least, that's how AutoNation (NYSE: AN  ) CEO Mike Jackson sees it. His company reported encouraging results this week, with profit up double digits and a top line sales figure that beat the Street's estimates. Though the stock was down slightly and analysts maintain a relatively neutral outlook, the company has encouraging fundamentals and a growing business that may be worth an extra glance. Here's what you need to know.

The numbers
Both top and bottom line numbers showed double-digit year-over-year gains for AutoNation. The company hauled in sales of $4.43 billion -- a more than 13% premium over the prior year, and a 8% gain sequentially. Wall Street analysts were expecting about $10 million less.

As for EPS, things looked equally strong, if less impressive to the Street. AutoNation earned an adjusted $0.73 per share -- 10.6% more than the prior year's quarter and 7.3% above the previous quarter. The number came in right around the average analyst estimate. Both new and used vehicle sales bumped up more than 10%, with the latter growing the most at 13%.

Jackson was excited to showcase the double-digit gains, citing the U.S. auto industry as one of the brightest spots of the economy. He went on to highlight the company's customer care division. The customer care business is basically parts, service, and collision services, and the segment expanded its gross margins this past quarter to 42.6%, helping drive a 19% increase in gross profit.

The company is holding a comfortable leverage ratio of 2.6 times -- a nice number considering that the company acquired three additional franchises during the period. In a year, the company has added 10 franchises at various levels, which management expects will deliver an additional $1 billion in revenue.

So, why did the stock move lower on generally good news from the company?

Meaningless drop, strong outlook
Perhaps the Street wanted a beat on EPS to go with the sales beat, and that was the reason for the roughly 1 point drop in stock price on Thursday. Either way, it doesn't actually matter. The company is looking strong, with a conservative balance sheet and a still-attractive growth runway. Analysts have bumped up their full-year earnings guidance by a couple of pennies, expecting $2.95 in EPS. At that level, the company is trading at 15.2 times year-end earnings, and less looking further out.

Compared to some of the auto manufacturers, AutoNation may look expensive. But the company does not carry the brand risk that an individual maker does, nor (obviously) does it have the high capital requirements of developing and producing new vehicles. Group 1, a competitor that is a fraction of the size, trades cheaper at 11.4 times forward earnings and is experiencing the same tailwinds as AutoNation. The other gorilla in the industry, CarMax, leads the pack in terms of valuation at more than 20 times forward earnings.

Investors are wise to take a look at AutoNation, and perhaps look further into Group 1. Industry tailwinds and comfortable fundamentals make both of these companies compelling stories.

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9/30/2016 4:02 PM
AN $48.71 Up +1.45 +3.07%
AutoNation CAPS Rating: ***