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AutoNation (NYSE:AN) has revealed a 44% rise in profits to $65 million or 36 cents per share in the third quarter from $44 million or 25 cents per share in the year-ago quarter. (See earnings call transcript.) With this, the largest automotive retailer in the U.S. has inched past the Zacks Consensus Estimate of 35 cents per share.

Despite lower new vehicle industry volume, the retailer benefited (especially in the Domestic and Import segments) primarily from “Cash for Clunkers” cash incentive vehicle-exchange program. The program, launched by the U.S. Government in late July and open for a month, succeeded in attracting a large number of consumers to the retailer’s showrooms. It aided the retailer’s results for the latest quarter by 7 cents per share.

Revenue for the quarter slipped 13% to $2.9 billion, triggered by lower vehicle sales volumes. Total segment operating income improved to $111 million from an operating loss of $1.6 billion a year ago.

Segment Performance

Sales in AutoNation’s Domestic segment – comprising stores that sell vehicles manufactured by General Motors, Ford (NYSE:F), and Chrysler – tumbled 13% to $922 million. However, segment operating income improved to $34 million from $25 million in the third quarter of 2008.

Sales in AutoNation’s Import segment – comprising stores that sell vehicles manufactured primarily by Toyota (NYSE:TM), Honda (NYSE:HMC), and Nissan (OTCPK:NSANY) – shrank 13% to $1.2 billion. Nevertheless, segment operating income rose to $63 million from $52 million in the third quarter of 2008.

Sales in AutoNation’s Premium Luxury segment – comprising stores that sell vehicles manufactured primarily by Mercedes, BMW, and Lexus – sank 14% to $775 million. However, segment operating income increased marginally to $44 million from $43 million in the third quarter of 2008.

Financials

AutoNation had cash and cash equivalents of $204.5 million as on Sep 30, 2009, an increase from $60.5 million as on Sep 30, 2008. In the first nine months of 2009, capital expenditures decreased to $40.5 million from $96.7 million in the same period of prior-year. However, the company's Board of Directors has approved a 65% increase in capital expenditure to $150 million for the next year.

AutoNation repurchased 3.7 million shares of common stock in the quarter for an aggregate purchase price of $65.8 million, reflecting an average purchase price per share of $17.81. The Board of Directors has authorized an additional $250 million for the repurchase of its common stock.

Going forward, AutoNation expects the automotive retail market to remain challenging throughout the remainder of 2009. However, the retailer is optimistic about a gradual recovery beginning in 2010.

We recommend the shares of AutoNation as Neutral.

Source: AutoNation: Riding Out Lower Volume