Car sales company AutoNation (NYSE: AN) reports fourth-quarter and full-year 2007 earnings results tomorrow morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Fourteen analysts follow AutoNation today, one more than a year ago. Three of them would buy the stock, nine would hold it, and two would sell it. Our Motley Fool CAPS community is more bearish, offering the stock just two out of five stars.
  • Revenue. On average, the analysts are looking for quarterly sales to slip 5% to $4.23 billion.
  • Earnings. Profits are predicted to fall 9% to $0.32 per share.

What management says:
If there's one word you never want to hear uttered by management of a company you own, it's "challenging." Whether it's from La-Z-Boy or Harley-Davidson (NYSE: HOG) -- or any of a dozen other consumer-products companies -- the dread "C" word sounds a death knell for corporate profits. And be warned, dear investor, for this bell tolls also for you. Unfortunately, that's precisely the word that AutoNation CEO Mike Jackson used to describe the environment for new car sales last quarter, and to explain his firm's declining earnings.

If you're wondering when things will start looking up, Jackson says not to expect too much good news so long as "the housing market difficulties persist."

What management does:
And yet, challenging or not, AutoNation is doing a fine job of riding out the storm. At all three major profit margin levels -- gross, operating, and net -- AutoNation has stopped its slide and stabilized its profits. In so doing, it's earning a better operating margin than rivals Sonic Automotive (NYSE: SAH), Penske Automotive (NYSE: PAG), or Group 1 Automotive (NYSE: GPI) -- in that order. And it's not lagging Motley Fool Inside Value recommendation CarMax (NYSE: KMX) by much.

Margins

6/06

9/06

12/06

3/07

6/07

9/07

Gross

16.0%

16.1%

16.0%

16.1%

16.1%

16.1%

Operating

4.3%

4.3%

4.2%

4.2%

4.1%

4.1%

Net

1.9%

1.7%

1.7%

1.6%

1.7%

1.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
While stable performance in a "challenging" environment is nothing to sneeze at, I have to say that I'm not entirely impressed with some of the other things AutoNation has been up to lately. Chief among them is the company's continuing share buybacks.

AutoNation has blown through most of a $500 million share buyback program authorized in April 2007, and just re-upped for an additional $250 million in shares. However, the company lacks the cash on hand to fund these buybacks, has negative free cash flow, and appears to have increased its long-term debt load, according to information from Capital IQ.

Personally, I think that's the wrong move. Because I find it difficult to value a company with negative cash profits, let's look at this firm's P/E ratio for a moment and see if it seems cheap. It sports a trailing P/E of 10, with most analysts agreeing that AutoNation will grow those profits at about 9% per year over the next half-decade. While billionaire Eddie Lampert apparently finds value in the company, I still think it seems overpriced. Relative to rivals Group 1, Sonic, and Penske (but not CarMax), it looks overpriced. Each of these rivals sells for a lower PEG ratio than does the nation's largest car dealer.

Here's hoping tomorrow's report contains better news of less challenging times and proves me wrong.

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Fool contributor Rich Smith owns shares of CarMax. The Motley Fool has a disclosure policy.