AutoNation (NYSE:AN), the largest auto retailer in the U.S., certainly has some big-time backers. Edward Lampert, chairman of Sears Holding Corp (NASDAQ:SHLD), owns 24% of the company through his investment vehicle RBS Partners. Unfortunately, this will probably not be enough -- at least for the next couple of quarters -- to get much traction for shareholders.
In the fiscal fourth quarter, revenues edged up 2.2% to $4.47 billion. While profits were flat, earnings per share increased from $0.36 to $0.28 as the company has been recapitalizing by issuing debt and aggressively buying back its shares.
AutoNation has scale, with 257 dealerships and only about 59% of its revenues coming from new vehicle sales. The company has a diversified base of revenues, such as used vehicles, parts, maintenance, extended service contracts, vehicle protection, and financing.
AutoNation also has a sophisticated Web-based information technology (IT) system. The IT system helps to predict demand levels and, as a result, manage inventory. Inventory costs can be a big problem for auto dealers -- it's expensive having lots of cars sitting on a lot.
CEO Mike Jackson has been discussing with auto manufacturers ways to get better control of inventory. However, the major issue is that companies like GM (NYSE:GM) and Ford (NYSE:F) have high legacy costs for health care and pensions; these companies see higher revenues as a way to cover these obligations. This is not necessarily a bad thing, but unfortunately, Detroit has a tendency to build cars that people do not want to buy.
To get dealers to take the cars, there are usually a myriad of incentives. As a result, even if an AutoNation dealer does not take the inventory, a competing dealership may do so, filling the market with too much inventory.
AutoNation's own forecast on U.S. vehicle sales for 2007 is in the "low 16 million" range. Things are expected to be stagnant, which is the consensus of other sources, such as the National Automotive Dealers Association, which has a 2007 forecast for 16.5 million units. Keep in mind that sales were 16.55 million units in 2006.
Despite heavy stock buybacks, which have meant taking on more debt, AutoNation's stock price has not responded very strongly. Investors are concerned about the difficult environment and weak operating results, and all in all, there is little here for investors to get excited about.
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Fool contributor Tom Taulli does not own shares of any company mentioned in this article. The Fool's disclosure policy has extra-large cupholders.
