AutoNation Inc. (AN)
Buy below: $21.30
Stop loss: $18
Forward ROA YoY Growth (%): 130.71
Forward ROA Revisions (%): 83
Business: AN is one of the leading automotive retailers in the US. It distributes new vehicles, used vehicles, part and services, automotive financing and insurance for both domestic and imported brands, through its 232 stores located in major metropolitan markets.

Most Recent Results (1H09): Total revenues were down 32%, with new vehicle sales down 39%. Cost control measures allowed the declines in operating income and EPS from continuing operations to be smaller, at 28% and 2% respectively. New vehicle sales comprised 50% of total revenues, but only 6% of operating income. Parts and services comprised only 21% of total revenues, but 44% of operating income.

Investment Thesis: The recent results certainly shows the difficulties in the US automotive retail market. Even sales of imported brands were down 36%. AN however did well to keep inventories and costs down to maintain margins. Inventory was brought down to only 31k new units from over 50k new units a year ago. The announcement of the cash-for-clunkers program allowed the stock to outperform in the past few months, but with the program officially ending as the $3 Bil in stimulus funds ran out (AN stopped taking orders for the program last Friday), there are concerns whether the benefits are a one-time and non-recurring.

For one, the success of the cash-for-clunkers program proved that there is pent-up demand for new vehicles. AN itself was able to sell more than 10,000 vehicles qualified under the program in less than a month, that's more than 30% of its inventory! The program alone has boosted overall US automotive sales from a dismal 9 mil units a month annualized to about 12 mil units a month annualized. While the rush to auto dealers isn't expected to be sustainable, the monthly annualized sales rate is expected to stabilize at above 10 mil units. Even before the clunkers program, AN already stated during its first half results announcement that the industry is stabilizing, with industry new vehicle sales not suffering a sequential decline for the first time since end-2007. It seems the clunkers program put a definite bottom to the industry and provided the needed impetus for an actual recovery starting this year.

Another thing that the clunkers program did was to at least provide a reason for consumers to head toward the showrooms, even if they realized their vehicles were not qualified for the program. Its a signal to consumers that it's okay to shop for vehicles again. It also allows dealers to whittle down their inventories and thus provide better pricing power in the future. I don't think the dealers will expand their inventories irresponsibly when a recovery kicks in, given what they have gone through. Auto manufacturers have also been given a boost and are expected to try to replicate, even if not to the same level, the incentives the clunkers program provided, even after the program expires. Finally, the Bureau of Economic Analysis released a report revealing that the automotive industry is helping to contribute to the "big picture" recovery. Motor vehicle output helped to boost gross domestic product (GDP), adding 0.20% to the second quarter change in GDP. In the first quarter, these same sales had subtracted 1.69% from results.

Technical Analysis: AN is showing good momentum after the announcement and implementation of the clunkers program. The price is above the 32-day moving average, and the MACD is settling above zero, which is an accummulatiion signal. Initial resistance is at $21.33, with support at $18. Chances of eventually breaking through resistance is high.