AutoNation And Volkswagen Are On The Right Track

Includes: AN, VLKAY
by: Valuentum

One of the United States' largest car dealership owners, AutoNation (AN) recently announced strong sales numbers for the month of June and subsequently for the second quarter. The firm sold 38% more units in June of 2012 than it did in the same month last year, while it sold 31% more units in the second quarter of 2012 than it did in the same quarter of 2011.

As we expected, sales were strong across all segments. Domestic auto sales increased 25% in June on a year-over-year basis, while imports increased 56% and premium luxury grew 20%. The majority of domestic sales at AutoNation are driven by Ford (F), which we think will report strong second quarter sales growth in North America. AutoNation's import growth is likely related to increases at its Honda (HMC) and Toyota (TM) dealers that are now stocked with plenty of inventory following the Japanese supply-chain disruption. Further, the firm's strong results in its luxury segment bode well for Mercedes-Benz and BMW (BMW). Premium luxury is a smaller segment of the firm's overall mix, but higher average selling prices in the segment could result in higher profitability.

AutoNation is mostly highly exposed to California, Texas, and Florida. Strong auto sales in these particular states suggest that the US economy is stronger than many bearish pundits believe. Buyers confident enough to purchase new vehicles could indicate strengthening consumer confidence, which could have implications for the broader economy. Though we like the fundamental improvement at AutoNation, we think shares are fairly valued at this time, and the firm only registers a 6 on our Valuentum Buying Index (our stock-selection methodology).

While AutoNation is selling more cars in the US, German automaker Volkswagen (OTCPK:VLKAY) finally acquired the remainder of Porsche's automotive unit. Porsche gives Volkswagen a dominant sports car franchise and will present the firm with an opportunity to realize significant cost savings. Volkswagen will likely surpass General Motors (GM) and Toyota as the top car manufacturer in the world, and it currently sells almost every possible land vehicle imaginable.

The deal was clearly a win for Volkswagen, as some clever accounting taxes will allow the firms to avoid a merger tax, and it allowed Volkswagen to acquire the remainder of Porsche for significantly less than it valued the company. Volkswagen's success with Audi in North America over the past few years leads us to believe that the firm will be able to successfully grow Porsche's business. The firm's willingness to take on the deal given macroeconomic headwinds suggests Volkswagen thinks it will be able to successfully navigate the uncertain economic landscape.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: F is included in the portfolio of our Best Ideas Newsletter.