Opinion on  AutoNation Inc. (AN)     Sector: Services  >  Industry: Retail (Specialty)
Bullish on AN ...

Years ago it was relatively easy to understand Cisco’s core proposition, networking. The company enabled consumers and businesses to connect, communicate and collaborate online. They provided the infrastructure that made the world-wide-web a reliable and reachable user friendly portal for endless on-line discovery. As time progressed since 1984, the year of Cisco’s inception, the scope and functionality of their proposition has solidified itself deeper into cutting-edge geek territory. Despite the vast numbers of consumers embracing the internet, most investors myself included, have a less than comprehensive understanding of the product development advances Cisco is introducing to help grow Web 2.0.

Fortunately, we are no more obliged to become an expert in disparate local area protocols, before we analyse Cisco the company, than we are required to become a chemist before we can value GlaxoSmithKline. Balance sheets, profit & loss statements, cash flow forecasts, the acquisition strategy, market share data and innumerable other sources of information are collectively sufficient to facilitate a conclusion on the stock. Cisco ticks most of the boxes in quick succession, but certain features of the company’s progress are worth highlighting. The first is the incredible and largely successful acquisition policy. I researched Cisco acquisitions since 1993. I stopped counting at 120. They have secured a countless number of ideas, innovations, technologies and products. The intellectual wealth within the Cisco’s 66,000 employees is an asset a balance sheet can’t adequately value. The policy of securing smaller specialist firms has also strengthened Cisco’s hand by giving it strong market share across dozens of sub-sectors within the industry providing it with leadership in voice, wireless LAN, digital video, switching (modular and fixed), web conferencing, etc. You don’t need to understand the technology within the sub-sectors to know that being dominant in market share is the function of a winning corporate formula.

So, for investors, is the success and strength of the business model priced in? I suggest not. I looked at the coverage of 8 leading analysts and they agree. None had a sell recommendation and the buys and neutrals are split evenly. The stock at circa $19 is more or less the same price as 5 years ago yet earnings per share (eps) 2004/08 has produced an impressive 21% compound rate of growth, source Finviz. My own calculation, looking at diluted net income per share, produced a 16% compound growth rate over the same period. Even taking into consideration the wider economic challenges and a difficult current year, I smell value. The stock is loitering on a support level and if markets stay firm or rally, I expect CSCO to bounce off that support level and make new progress. Balance sheet cash/short term investments of $33bn as at the end of the most recent quarter further reassures.

The writer has no interest, direct or indirect, to any financial instrument that offers exposure to companies mentioned in this review. http://tradinghelpdesk.wordpress.com

Sorry... copied and pasted the worng piece posted the wrong piece. Here's AN.

AutoNation is America’s largest specialist automotive retailer. The very statement encourages readers unfamiliar with the company to jump to conclusions. Just weeks after the formal demise of GM and Chrysler, hasty journalists need to be restrained from writing the retailer’s epitaph, exercising tired sound-bites about the demise of a once fine industry then maybe just adding a token chart, almost as an after thought. That route of analysis is fundamentally flawed. Never judge a book by its cover and never write-off a company because it’s in a beaten-up sector. AutoNation needs GM and Chrysler as much as an Eskimo needs a swim suit – not at all. The impact of GM’s notification that six of AutoNation’s dealerships (out of approximately 230) were identified for closure represents about 0% of AutoNation’s 2008 operating income. Zero impact. Chrysler is almost as insignificant. The seven AutoNation dealerships highlighted in the Chrysler consolidation plan equate to just 1% of the dealer’s 2008 operating income. Incredible but true. But then AutoNation does retail the vehicles of 35 other manufacturers. That’s what you call diversification.

The next hasty and incorrect conclusion would be to look back to the 1950’s for the historical roots of AutoNation. Surely the largest pure-play auto retailer built its foundation for success in the great era of vehicle sales growth? Not at all. Try 1996. No wonder the firm has been voted America’s most admired auto retailer, by Fortune Magazine, five times in eight years. But then being the first firm to sell 7 million vehicles does tend to attract attention.

Strategically, AutoNation continues to focus on import brands and the higher-end of the market. Business conditions remain very challenging and the recession will continue to hold back revenue and unit margins for some time. 2008 data highlighted 59% of dealer’s revenues were derived from new sales, 29% from used and 12% from servicing and parts. As consumers continue to delay a new vehicle purchase that ratio is likely to change as owners increasingly need to service and repair their aging autos rather than choose the more expensive trade-in option.

The AutoNation Chairman and CEO, Mike Jackson, has led the business ably since 1999. In a famous 2006 New York Times interview he was asked what auto he drove to work in. “A Mercedes-Benz”, replied Jackson. That tells you everything you need to know about AutoNation and unfortunately GM.

Moving onto the firm’s valuation, the stock has had a stellar run since recovering from the oversold position late in 2008. It’s difficult to identify reasons why the stock should continue that upward momentum, at least in the short-term. At $16.76 it’s a hold at best. If the wider stock market retreats, I would gladly short AutoNation confident of a near-term profit, on the expectation the stock should underperform (fall quicker), as investors aggressively short the stock or take profits following its spectacular run from $4.00 (October 2008). If the market resumes its upward path, I would look for long opportunities elsewhere. Great company and well managed, but not an eye-catching long opportunity at the current price.