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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (1195)	10/2/2003 9:24:28 AM
From: russwinter	Read Replies (1) \| Respond to of 110194

I have a short idea to trade this: Autonation (AN) 22% of their 370 auto franchises are in Calf (rest mostly in Fl, and TX), so there is the potential for a little earnings "surprise" (.35 expected 3rd qt)if these Sept. sales are borrowed from future quarters. Earnings will be out in a few weeks. If the stock reacts positively in a kneejerk manner, that would be the short entry point. Obviously this outfit is highly vulnerable to both consumer and energy related shocks. EPS (2003 est. 1.35)sensitivity is: 100 BP interest rate increase .032 1% increase (or decrease) new car vol .012 1% increase used car vol .006 1% increase parts-service .013 Of the 3.0b in gross profit that AN generates, 36% comes from their high margin parts and service business. Obviously this is heavily influenced by basic auto warranties. That's been good for them given the large numbers of US autos sold in 1999 (14.325m domestic sales) and 2000 (14.4m) in particular. Auto warranties typically run either 3 or 4 years, or 36,000/50,000 miles. So that part of the car fleet is coming off warranty now, and it doesn't a rocket scientist to see that service business could drop off when customers have to pay more out of pocket (with what?). As we get into 2004, AN will be more dependant on the 2001 fleet (13.93m), and 2002 fleet(13.425m) for service revenues. Domestic car sales were 12.7 annualized in the 1h/03, with a little rebound in the front loaded 3Q. The Sept issue of Contrary Investor.com contraryinvestor.com shows a auto and truck sale chart going back to 1975, so as to illustrate the depth of a real cycle. He also asks the obvious question, "Just what are we supposed to be recovering from in the current cycle?" There are a few ways to value this enterprise. On a PE basis it looks fairly reasonable at 14X PE. In the "normal" years since 2000, AN has generated 1/2B in free cash flow. So the question is, are those "normal" years, because if not that profitability could evaporate quickly. One aspect that might limit AN from a wipeout is that they've largely exited in house financing, so don't look too vulnerable to a rec. debacle. However, they do use a pretty tight, leveraged balance sheet and are dependant on credit lines, and auto company inventory carry programs to run their business. Speaking of inventories, they've swelled. At 9/30/02 they had 2.252b on the lots. At 2q, 03 it was 2.809b. Comparable sales in 03 to 02 have been flattish, so it will be interesting to see if they got some of this moved in the "recovery" 3Q period. The market values AN (@ 18.15) on a enterprise basis at around $6 billion. That values each franchise at around $16 1/4 m. AN's average acquisition ran at less than $10m in 02, 03. My search for typical auto dealerships sales turned up $10m on average. Of course I have no way of comparing AN apples with avg dealer oranges as perhaps AN dealerships are 50% larger or 50% more profitable, but it's a matrix to consider? Perhaps the clue comes from the $3.1b in goodwill AN has on the books. I suspect the EV may be overvalued by that amount, especially in a downturn. Other's analysis welcome on this one? finance.yahoo.com