AutoNation (AN)

Eddie Lampert of Sears Holdings (SHLD) can't seem to buy it fast enough and he currently owns over 35% of the company. Forecasts this year call for about 15.5 million cars to be sold. Now, for an interesting tidbit. On CNBC Wednesday, CEO and Chairman Mike Jackson did an interview and spoke of running his (or any) business. In the interview he said he runs his business for "a 1,000 year flood." He then said that if auto sales dropped to 10 million units, "a depression" he called it, his business would be "cash flow neutral." That is his basis for decision making.

And Bill Gates has to be the most charitable man alive. Now, he is providing a chunk of his assets to help out ailing Autonation (AN). Sure he takes a nice piece of the company and if you look at the history of this once darling/roll-up king, you will realize that this may be actually approaching a bottom. Whether it is a brilliant move or a plan for a tax write-off is still not known, but it does appear that Autonation’s CEO Michael Jackson seems to have a plan for cost cutting and working within this difficult environment. Do we follow Gates into this without any thought? Do we then follow Lampert as he has been continuing to add to his holdings (40% now)? Maybe not.

How about a contarian play? Maybe… Whatever you think about the fate of the auto industry, this happens to be a well run company that is caught within a very bad situation. It is at a relative low and as oil prices seem to be turning and companies are waking up to the fact that they need to change their ways. This could give Autonation a boost. The biggest concern is still the consumer and his or her ability to buy or borrow to buy a new car.

AutoNation's markets in California and Florida, which account for half of new vehicle sales, drove down earnings last year. The two states account for 20 percent of industry-wide new vehicle sales. When things get better, investors ought to see an amplified increase on the other end due to the repurchases. Hold flat in down times and explode up in good ones, very nice.

Forecasts this year call for about 15.5 million cars to be sold. Now, interesting tidbit. On CNBC, CEO and Chairman Mike Jackson was speaking of running his (or any) business. In the interview he said he runs his business for "a 1,000 year flood". He then said that if auto sales dropped to 10 million units, "a depression" he called it, his business would be "cash flow neutral". That is his basis for decision making.

As a potential investor, this is fantastic news. It simply means that the business will still produce cash even in an almost devastating economic climate. Wonderful...

A positive cash company in the current economic climate makes for tremendous flexibility competitors will not have. Jackson can reduce debt, repurchase shares or expand. In fact, Jackson has reduced share count by 30% the last two years. The repurchases have allowed EPS to stay flat at $1.44 despite the downturn in the auto industry during that time frame.

In the past two years, U.S. auto retail sales have declined 12 percent, Jackson said in early February and he said that economic downturns run in cycles of 30 to 40 months, and the market is currently 24 months into the downswing.

AutoNation's markets in California and Florida, who account for half of new vehicle sales drove down earnings last year. The two states account for 20 percent of industry-wide new vehicle sales.

When things get better, investors ought to see an amplified increase on the other end due to the repurchases. Hold flat in down times and explode up in good ones, very nice.

The demand for auto related items can be found in recent news from auto parts retailers like AutoZone (AZO) and Advanced Auto Parts (AAP) who both reported increased earnings in the latest quarter. The things is, people have to have cars, the demand will always be there and Jackson has built a business that can capitalize on all demand scenarios.

Trading at 9 times earnings AutoNation will be a winner when demand for auto's returns. That, it turns out may be sooner than we think. $4 a gallon gas is already changing people behavior and there just may be a rush to trade in that SUV for something much more affordable on gas. Whether it happens now or year from now, AutoNation currently trades at a multiple that assumes it just may never happen, that is wrong..

First the news:

UBS bank downgraded the Fort Lauderdale-based company’s stock to "sell" from "neutral."

An analyst report by the Zurich, Switzerland-based financial services company said: “We believe that AutoNation continues to face liquidity concerns, especially in the third quarter of 2009, when its debt covenant thresholds change.”

UBS analyst Colin Langan wrote in his report that “AutoNation is currently trading at 19 times our revised 2009 earnings per share estimate, above its historic average, despite its limited liquidity."

The UBS downgrade came one day after AutoNation announced a new program to cover customer auto loan payments for six months if the customer suffers a layoff or involuntary job loss.

AutoNation (NYSE: AN) said Wednesday it will cover customer payments for six months in the event of job loss. The program starts Thursday in 33 South Florida dealerships. It’s similar to one announced by Hyundai last year, in which the Korean automaker allows people to return cars if they lose their jobs.

Customers must have been employed for at least 30 days and apply for unemployment benefits. The benefit does not start until the car has been owned for three months, according to an advertisement.

What does it all mean?

Well, for UBS to be remotely accurate, annual vehicle sales would have to:

1- Drop below the 9 million annual units they are now 2- AutoNation's cost cutting program that is still ongoing would have to come to a complete stop 3- The "job guarantee" program referenced above, the one which Hyundi has called a "home run" would have to be a flop (Hyundai has seen sales fall by the lowest amount, due to the program) 4- Fewer dealerships would close, thereby eliminating the market share gains AutoNation is currently seeing 5- The recently enacted TALF would have no effect of the industry, despite that fact it already has.

Let's not forget, Mr. Langen is predicting the US auto market out to Q3 this year. It just is not possible to do that at this point with any degree of accuracy. There are so many material events currently unfolding designed to free up the credit necessary for the market to grow that making an assumption about what will happen almost 30 weeks from now is just irresponsible.

There is significant postponed demand right now. A friend of mine who sells cars told me this weekend that loans that were a blanket "no" a month ago are now getting a serious look and more are being approved. The now 6 month backlog of buyers out there is starting to show signs of letting loose.

They initiated it with a "neutral" in Jan 2008 ad then as the economy and credit markets fell off a cliff they maintained the "neutral". As consumer credit totally froze in Q4 2008 and up through Jan. 2009, UBS was still "neutral". But now, that the program AutoNation CEO Mike Jackson called for last year to free up consumer credit (TALF) has just been enacted, now that we are actually seeing signs credit flowing and previously denied consumers getting auto loans, now it is time to jump ship.

Time to jump ship for a reason that is unprovable and at best a wild guess. This just typical. It gets even more bizarre when you consider AutoNation itself is not giving guidance. They have said that the situation is too fluid and changing daily, therefore any look down the road can easily be inaccurate. In other words, the guys who are on the inside and have all the information aren't comfortable looking down the road. Perhaps next time Mr. Langen next time ought to actually go to AutoNation, take a look around and talk to executives, it would improve the accuracy of his projections...

Remediable all the "buy calls and $900 - $1000 price targets from analysts in Google (GOOG) when ut was at $700???? today? $330.

You should give this the the same treatment.....ignore it.

A positive cash company like AN in the current economic climate makes for tremendous flexibility that competitors will not have. Jackson can reduce debt, repurchase shares or expand. In fact, Jackson has reduced share count by 30% over the last two years. The repurchases have allowed EPS to stay flat at $1.44 despite the downturn in the auto industry during that time frame.

Eddie Lampert of Sears Holdings (SHLD) can't seem to buy it fast enough and he currently owns over 35% of the company. Forecasts this year call for about 15.5 million cars to be sold. Now, for an interesting tidbit. On CNBC Wednesday, CEO and Chairman Mike Jackson did an interview and spoke of running his (or any) business. In the interview he said he runs his business for "a 1,000 year flood." He then said that if auto sales dropped to 10 million units, "a depression" he called it, his business would be "cash flow neutral." That is his basis for decision making.