Option Trade
AutoNation, Inc. (NYSE:AN) Calls 
Tuesday, July 21, 2015

**OPTION TRADE: Buy the AN Oct 2015 65.000 call (AN151016C00065000) at market price (approximately $3.00), good for the day. Place a protective stop loss at $1.20, and a pre-determined sell at $6.00.

by Ian Harvey

July 21, 2015

Introduction

AutoNation, Inc. (NYSE: AN), an automotive retailer in the United States, is set to report second-quarter 2015 results on Jul 22. Analysts expect the company to announce earnings of $1.01 per share and revenue of $5.22 billion for the quarter. In the last quarter, the company posted an 11.49% surprise.

If AutoNation's past performance is anything to go by then we can expect continued robust growth in EPS. Indeed, fiscal first quarter 2015 marked the eighteenth successive quarter of high double-digit percentage growth in EPS.

Parts, services and repairs are a high margin business for auto dealerships. It’s a business AutoNation is looking to get more involved in, despite the fact that close to half its gross profits are already generated from this segment.

The beauty of the repair market for car dealers is that they have an advantage over smaller repair shops, where automakers generally require any warranty work to be done at a dealer.

AutoNation still has one of the best balance sheets in the dealership space and is one of the cheapest, with a forward price-earnings ratio of 14.5 based on next year’s earnings estimates.

Technical Details

AutoNation has a 1-year low of $46.16 and a 1-year high of $67.50.

The stock has a 50-day moving average of $63.64 and a 200-day moving average of $62.52.

The company has a market cap of $7.55 billion and a P/E ratio of 17.87.

Earnings

Previous Earnings

AutoNation last announced its earnings results on Wednesday, April 22nd. The company reported $0.97 earnings per share (EPS) for the quarter, beating the consensus estimate of $0.89 by $0.08. The company had revenue of $4.90 billion for the quarter, compared to the consensus estimate of $4.83 billion.

During the same quarter in the previous year, the company posted $0.75 earnings per share. The company’s revenue for the quarter was up 13.3% on a year-over-year basis. On average, analysts expect AutoNation to post $4.12 EPS for the current fiscal year and $4.60 EPS for the next fiscal year.

Future Earnings

AN's very balanced revenue-mix has ensured its top-line growth is not tied or over dependent on a particular business category. For instance, in fiscal year 2014, AN's new-vehicle business accounted for about 55% of the total revenue, while other business units-retail used vehicles, parts and services and finance and insurance-made up the balance. And all these revenue streams have been witnessing consistent growth.

During the year 2014, its new vehicle category saw revenue increase by 10.3%, year-over-year, while retail used vehicle business posted 7.9% top-line growth. Its high-margin parts and services business grew by 8.7% and finance-insurance unit grew by 11.4%. In the fiscal first quarter ended March 31, AN's revenue jumped 13% to $4.9 billion, driven by stronger performance across all business sectors. While new vehicle unit sales rose 10% in the first quarter, year-over-year, retail used vehicle unit sales increased 12%.

The momentum has continued in the fiscal second quarter too as it registered a 7% jump in new-vehicle unit sales, to 86,794, year-over-year. In June, AN posted a 9% jump in new vehicle unit sales, year-over-year.

Why AutoNation, Inc.?

As mentioned above, AutoNation recorded a year-over-year increase of nearly 7% in new vehicle sales to 86,794 units in the second quarter of 2015. On a same-store basis, retail new vehicle sales improved 4% year over year. The Domestic segment's sales improved 8% to 26,826 units, the Import segment's sales inched up 1% to 41,018 vehicles and the Premium Luxury segment sales surged 17% to 18,950 units in the quarter. Improved sales volume in the quarter will boost revenues for the company.

In addition, the company is poised to benefit from expansion of its business through acquisitions. In Apr 2015, the company purchased a Mercedes-Benz store in San Jose, CA and a Chrysler Dodge Jeep Ram store in Valencia, CA. AutoNation has also signed an agreement to acquire a Jaguar, Land Rover and Volvo store in Spokane, WA. The combined annual revenue from all the stores acquired by the company since the beginning of 2015, including the Jaguar, Land Rover and Volvo store, is $320 million.

Bolstered by strong demand for new and old vehicles in the backdrop of improving U.S. economy and lower gasoline prices, AutoNation has continued to post solid top-line growth in the first two quarters of the current fiscal year.

While its vast presence in the Sunbelt region along with dealerships of more than 30 new vehicle brands helped to drive up car sales, favorable macroeconomic factors have also played a key role behind the consistent revenue growth.

Also, in what could further propel AutoNation's vehicle sales in coming years, the auto retailer, with an investment budget of $100 million, is all set to roll out a set of tools on its website, which would allow wannabe buyers to complete almost the entire transaction online. The car retailer's digital store-- AutoNation Express-is expected to be available within a year, and will enable buyers to get all the car information and reviews online, thus reducing the role of middlemen like Autotrader.com and TrueCar.com. In fact, AutoNation has just ended its partnership with TrueCar.com earlier this month.

Hedge Funds Ownership

Institutional ownership of AutoNation was 62.04% of the stock’s outstanding shares. There are six institutional holders having the company in their Top 10. They are: Zeke Capital Advisors Llc, Rbs Partners L.P., Horizon Kinetics Llc, Old West Investment Management Llc, Shaker Investments Llc Oh, Lederer & Associates Investment Counsel Ca.

Analysts Opinions

AutoNation (NYSE:AN) was upgraded by analysts at Morgan Stanley from an “underweight” rating to an “overweight” rating in a research report issued to clients and investors on Monday, last week, with a price target of $70.00, saying the company is investing in technology and can become a megadealer.

The company has also been the subject of a number of other research reports:-

• Analysts at Deutsche Bank reiterated a “hold” rating and set a $61.00 price target (up previously from $59.00) on shares of AutoNation in a research note on Monday, April 27th.

• Analysts at Stifel Nicolaus reiterated an “outperform” rating on shares of AutoNation in a research note on Monday, April 6th.

• Finally, analysts at Zacks reiterated a “buy” rating and set a $69.00 price target on shares of AutoNation in a research note on Friday, March 27th.

Three equities research analysts have rated the stock with a hold rating and three have given a buy rating to the company’s stock. The company has an average rating of “Buy” and a consensus price target of $66.00.

Conclusion

AutoNation looks to be in a good position to sustain its amazing EPS growth story. Its TTM P/E is about 17.70, which is slightly below the industry average of about 19.60, which means that it is fairly priced for now.

Therefore, based on the facts above the following option trade is recommended…..


**OPTION TRADE: Buy the AN Oct 2015 65.000 call (AN151016C00065000) at market price (approximately $3.00), good for the day. Place a protective stop loss at $1.20, and a pre-determined sell at $6.00.



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