Quick Reactions To Today's Auto Retail Earnings

I'll have more details after all the calls tomorrow. But. . .

Ford Motor Company (F):

Swung to a surprise profit of $0.13 in earnings per share when investors were looking for a loss of $0.38. South America, Europe, and even the Premiere Automotive Group all showed pretty sizeable improvements.

For auto retail investors, however, what you really should have noticed was the following:

Ford North America: In the second quarter, Ford North America reported a pre-tax loss of $279 million, compared with a pre-tax loss of $789 million a year ago. The improvement primarily reflected favorable net pricing and cost reductions, partially offset by lower volume net of mix. Revenue was $18.8 billion, down from $19.1 billion for the same period a year ago.

Source: company press release

The riddle:

Inventories are coming down at dealerships. And yet the manufacturers (so far) are not slapping on hefty incentives to move the metal. And while I've been pretty encouraged with the initial results coming out of the large public dealer groups (Asbury and AutoNation), everyone kept talking about the tough environment.

This is the riddle we are trying to solve. Are we finally at the tipping point? Are the manufacturers like Ford finally able to ease back production (because of the employee buyouts last year?) Leaving dealers (frankly) on their own? And setting the stage for what I continue to argue is going to be a pretty big consolidation wave.

Let's wait and see how the rest of the summer plays out.

But what I can tell you is that I still think the strong are getting stronger. . .

Asbury Automotive (ABG):

Take for instance Asbury, 20% year-over-year earnings growth from continuing operations (excluding extraordinary items), a 12.5% increase in its dividend, and they look to be exceeding their acquisition targets.

AutoNation (AN):

Even AutoNation. Sure, they missed what the street was expecting. But they don't give guidance. So is the street all that good at figuring out what a company will earn one quarter to the next? There's just too many moving parts, and why I don't want you to get caught up in a quarter.

And yes management continued to whine about the California and Florida housing market. Finally, I was not too encouraged to see the Board of Directors extend the employment contracts of Mike Jackson and Mike Maroone out till 2010.

But let's face it. Net income was up 6%, and earnings per share (as they bought back stock) was up 15%. You won't get too many complaints out me for a quarter like that.

LKQ Corp (LKQX):

The company exceeded their estimates as well as the consensus forecast. Organic revenue growth of 10.5% helped drive operating margins up to 11.4% (from 10.6% in the second quarter of 2006). I still need to run the per facility metrics. But yet again another solid quarter out of LKQ.

I think the risk versus reward has changed for this name. When you've been firing on all cylinders for as long as management has, wall street starts to think you can "walk on water." So at some point something will likely happen to shatter this "walk on water" opinion.

And I still think Keystone shareholders deserve a better price (and hopefully this will become clearer in the coming months).

But I told CEO Joseph Holsten last week. If I were asked to rank the top CEO in the space, I think it would be a tough call between him and Roger Penske. To take a junkyard business and create a systemic change in the collision market is highly admirable (as is Mr. Penske's focus on employee retention/maximization). So I wouldn't want to bet against the folks at LKQ.

I just don't mind waiting for more level headedness to return to the stock price.

Monro Muffler & Brake (MNRO):

Earnings per share were a little below expectations. But if you exclude out an extraordinary item from last year, the company still posted a year-over-year earnings improvement of 14.9%.

And the company announced the acquisition of two tire chains. So the real challenge, and what I will be listening for on the call, is if the company has learned from some of the problems it has had with its last couple acquisitions and can make these go a little smoother. The ability to acquire and integrate is what I think is key to the Monro growth story going forward (well and the systemic industry change I see if large repair chains begin certifying used vehicles).