AutoNation: Retail is the Best Way to Invest in the Auto Industry

In response to the deluge of email I've received since Lampert's big buying in AutoNation (AN):

Overview:

AutoNation (AN) operates as an automotive retailer in the United States. As of December 31, 2007, it owned and operated 322 vehicle franchises from 244 stores located in major metropolitan markets, predominantly in the Sunbelt region of the United States. Its stores sell 38 different brands of vehicles. Core brands of vehicles sold, representing more than 96% of the vehicles sold, were manufactured by Toyota (TM), Ford (F), General Motors (GM), Honda (HMC), Nissan (NSANY), Daimler-Chrysler, (DCX) and BMW.

Despite Q1 EPS from continuing operations of $0.31 compared to a year ago of $0.39, AutoNation did outperform the U.S. retail auto sales market as it declined 11% according to CNW Research vs 8% for the company. In its main markets of California, Florida, Nevada, and Arizona, AutoNation's new unit sales were down 11% vs approximately 15% according for the industry according to CNW Research.

Industry analysts like CNW and J.D. Power forecast improved new vehicle sales beginning in 2009 due to fleet age and increase in vehicle scrappage, and a robust line-up of new products. CNW forecast new vehicle sales of 16.3 million in 2009, 16.7 million in 2010, and 16.9 million in 2011. We concur with this assessment for future new vehicle sales.

During Q1 the company repurchased 1.9 million shares of stock (1% of total) at an average price of $14.84 per share for a total of $28 million. Future repurchases are subject to limitations contained in debt agreements. As of April 1, 2008, they had capacity for share repurchases of approximately $32 million. They are permitted to add back 50% of net income after tax and any stock option exercise proceeds for additional repurchases.

Actually, that is a very unique and disciplined way to do it.

Non-vehicle debt-to-capital ratio was 33% at the end of the most recent quarter and spent $29 million on the acquisition of a BMW dealership. Inventory was at 57 days, 5 days higher than last year.

Shares are down 25% over the past year, based on the economy.

Buffett, Lampert and other value investors have been buying into the auto industry. The key to remember, if you are so inclined, is to stay away from the likes of Ford and GM and stick with the retailers. When the economy improves, so will their business. A stock price down 25% vs a 15% EPS decline? Sounds like an opportunity, especially when you consider the share count reduction that will cause EPS to jump on the other side of the rebound.

I think one could wait until the summer to pick up shares and not pay much more than today. It may not be such a bad idea...

Disclosure: No position.