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What Investors Need to Know About AutoNation's Second Quarter

By Daniel Miller – Jul 29, 2016 at 4:11PM

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AutoNation's top- and bottom-line results were mixed compared to estimates, but here are a few other factors to consider.

Image source: Getty Images.

For investors in the automotive industry -- whether you own stock in major automakers, parts suppliers, or dealership groups -- AutoNation (AN -3.04%) remains a good barometer. It's the largest new-car dealership in America and generates a significant chunk of its business in key markets such as California, Florida, and Texas. If you haven't listened to one of AutoNation's conference calls, you should, because chairman, CEO, and president Mike Jackson gives detailed and unscripted insight into the industry. Let's dig into AutoNation's second-quarter earnings report and see if there's any indication of whether or not the U.S. new-vehicle market is plateauing.

By the numbers

Starting from the top: AutoNation reported revenue of $5.44 billion, a 4.2% increase compared to the prior year, but short of 10 analyst estimates by Zacks that called for $5.56 billion. Looking at the bottom line, AutoNation reported second-quarter net income of $112 million, or $1.08 per share. While the earnings per share were above last year's $1.00 mark, results were a decline compared to last year's total net income of $115 million.

Investors can largely thank AutoNation's share repurchase program for the earnings-per-share gains. During the second quarter the company repurchased 1 million shares of its common stock, for a total of $50 million, and it has roughly $116 million remaining on its authorization.

Another factor for investors to keep tabs on is AutoNation's new and used vehicle gross profit per unit, as it gives insight into discounting pressure within the retail environment. During the first quarter its new and used gross profit per unit declined 8.2% and 7.7%, respectively. In the second quarter, that pressure lightened, but was still more intense than a year ago -- declining 3.3% and 4.7%, respectively.

The surge is slowing

Investors in the automotive industry have been outspoken about 2016 being the year that new-vehicle sales in the U.S. plateau, and there is some evidence of that within AutoNation's results. During the first half of the year, AutoNation's domestic segment income dropped slightly, from $164 million to $163 million. Its import segment income dropped 3%, from $155 million to $151 million. Worse yet, its premium luxury segment dropped 7%, from $189 million to $176 million.

Even as new-vehicle sales plateau in the U.S., they remain at elevated and healthy levels. But that does mean that AutoNation, like its competitors, is going to have to grow its top and bottom lines in other ways. One method is acquisitions, which AutoNation has been consistent about. Just recently, in July, the company completed the previously announced acquisition of four stores, which are expected to generate $190 million a year in additional revenue. Another method will be expanding its auto repair business, which generates a higher margin. Lastly, the company's investment in AutoNation Express could pay off by attracting more consumers, thanks to an easier online-to-in-store shopping experience. 

What management had to say

Jackson said in a press release:

We achieved record EPS from continuing operations. We benefited from our opportunistic capital allocation strategy, including acquisitions and share repurchase, and we began to see the results of adjusting our cost structure and inventory levels to the current industry selling environment. We remain focused on our strategy to manage costs and reduce our inventory levels going forward and we will continue to take advantage of capital allocation opportunities.

He added:

The Takata airbag recall continues to be disruptive to our business. However, in the second half of the year we anticipate improvement due to Takata airbag parts availability and compensation paid by certain manufacturers that will partially offset our costs.

It was clear from Jackson's comments on the conference call that going forward, the most concerning factor for investors will be how major automakers match supply and demand. It's critical that automakers tone down inventory if sales plateau; otherwise, excess inventory would negatively impact retail values, and perhaps heat up an incentive war that results in pain for everybody within the automotive industry. 

Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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