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AutoNation reported second-quarter results that matched consensus EPS expectations of $0.73 while revenue of $4.4 billion exceeded consensus expectation of $4.3 billion. Analysts  intend to raise the  fair value estimate to account for higher revenue growth and AutoNation capturing slightly more market share than we currently model in our five-year forecast period.  The results show that the U.S. auto recovery continues at a strong pace with AutoNation reporting record EPS and same-store revenue up 9.4% from the prior year’s quarter.

All three of the company’s segments (domestic, import, and premium luxury) posted double-digit percentage increases in revenue while domestic segment income led the growth in profits with a 23.3% increase. Management cited the Ford F brand in particular as a strong contributor and it is not surprising to hear the COO say the Fusion mid-size sedan is “hot, hot, hot.” Ford and Lincoln brands constituted nearly 18% of AutoNation’s new vehicle unit sales in the quarter, and the domestic and premium luxury segments grew volume at the expense of the import group.

The company also increased its operating margin on a pro forma basis per our math by 10 basis points year over year to 4.3% after excluding $11.5 million ($0.06 per share) of SG&A expense related to the previously discussed rebranding effort. This initiative is now complete and we expect the company to comfortably keep its SG&A as a percentage of gross profit below 70% as it has guided. Incremental throughput, which is the percentage of gross profit retained after overhead costs, was only 35% but this was due to costs to integrate recently acquired stores.

AutoNation finished the quarter with total liquidity of $864 million, which gives it plenty of cash to pursue the plethora of M&A opportunities available. The price gap between buyers and sellers has narrowed and more sellers are in the marketplace after staying out during the recession. CEO Mike Jackson stressed that AutoNation will remain very disciplined on price, will not issue shares to complete a deal, and is willing to not make any deals if the price is too high. This capital discipline will serve shareholders well over the long run. Another positive for the company is that its customers have not had any interest rate increases and current upward trends in market rates should not materially affect demand. Jackson estimates that a 100 bps rise in rates on a vehicle loan would raise a consumer’s monthly payment by just $15.

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