AutoNation 1Q07 Earnings Preview

AutoNation (AN) will issue a press release before the market opens April 26 telling us how many new and used vehicles they sold, arranged financing for, and fixed in January, February and March of 2007. We call this the first quarter.

A group called Zack's polled 13 analysts (not including me) that write investment research on AutoNation and came to the conclusion that on average, these analysts expect AutoNation to earn (so after the company has paid all expenses and taxes associated with selling and fixing the vehicles) about $0.40 per every share of AutoNation stock out there. If achieved, this would be about 8% better than what AutoNation earned per share last year in the first quarter.

At the end of the fourth quarter (so in December), AutoNation had about 212 million shares outstanding. Now some of the earnings per share improvement may simply come from AutoNation using its cash flows to buy back stock (thus reducing the number of shares outstanding). But if we just assumed the $0.40 was based on the 212 million shares out, it means the analysts are expecting AutoNation to earn about $85 million in the first quarter.

For all of 2007, based on Zack's survey, analysts expect AutoNation to make about $1.69 per share, about 9% better than what they did in 2006 (depending what extraordinary items you include/exclude). And in 2008, analysts expect AutoNation to make $1.87 per share, about 11% better than 2007.

They'll release the results before 7:00am. The conference call is at 11:00 am (eastern). The dial in number is 877-531-2987. The playback number is 800-475-6701. Access code # 867361. And will be available through May 3, 2007.

What I said last year when AutoNation reported 1Q06 results (April 28, 2006):

The focus on per unit pay simply improves the customer experience and actually has the potential to help the sales person earn more. One positive development in this direction, was management's discussion of their new "Smart Choice" system being tested out in their Florida stores that provides a convenient and clear print out of things like the purchase price, trade-in value, along with full disclosure of all taxes and fees. Management provided an example to us where they saw an entire transaction be done in ~40 minutes (versus the ~4 hours we understand it usually takes to complete the sale of a new vehicle). It's early, and the company will probably stumble a bit in the implementation and training (new processes never come easy to an "old" industry), but over time, we continue to think these types of initiatives are moving the company in the right direction in creating a more efficient, superior store model.

One thing we should point out with respect to this outlook is that management has indicated over the last couple of conference calls that expected SG&A improvements are likely to be "back ended" as they continue to invest into systems and processes. To wit, right now only 122 stores at varying levels are part of their accounting shared resource center and almost 30% of the company's stores are on a dealer management system [DMS]. As a result, investors should likely expect no SG&A improvement in 2006, and while it's anyone's guess, perhaps we will see 50 basis points of improvement in both 2007 and 2008. Further, the SG&A as a percent of gross profits does not take into consideration the ~50 basis points in additional SG&A expenditures the company will report this year due to the new accounting rule for stock option expensing (suggesting what investors will actually see at the end of 2008 is a net 50 basis point reduction in SG&A as a percent of gross profits from the end of 2005).

AN 1-yr chart: