With U.S. automobile sales down to 30-year lows and thousands of dealerships being shuttered by failed auto manufacturers, it might come as a surprise to learn that the largest automotive retailer in the United States is still cruising.
Oh, there were some rough days. But AutoNation Inc. has not only managed to survive during these tumultuous times, its shares have surged more than 300 per cent from their lows in October and are now within 24 per cent of their record high.
Of all the stocks in the S&P 500, it ranks 19th in terms of its year-to-date performance, with gains of 76 per cent.
How can this be for a car retailer, let alone one that lost $1.2-billion (U.S.) last year and has seen sales plunge nearly 36 per cent?
Part of the story here is that investors are growing optimistic that as bad as things have been for car sales in the United States, they are bound to improve as credit starts flowing again, the jobs market stabilizes and American consumers reach a point at which they won't sock away any more money in their savings accounts.
There's more to it though. AutoNation does not just sell GMs and Chryslers, the two manufacturers that have been hardest hit in the downturn. It also sells a significant number of Toyotas, Hondas, Nissans, Mercedes and BMWs - not to mention Fords - giving it a level of diversification that helps when the home market is in trouble.
Indeed, domestic cars represented just 30 per cent of the company's inventory last quarter, and recent plans by auto manufacturers to cut about a dozen of AutoNation's Chrysler and GM dealerships (out of a total of about 300 new-vehicle dealerships) will have a negligible impact on the company's operating earnings.
But AutoNation's remarkable gift for cutting costs is also key to the stock's resurgence: In the first quarter alone, management cut $200-million in costs and reduced the company's debt by about $500-million.
Rod Lache, an analyst at Deutsche Bank, pointed out that these cost reductions have reduced the company's fixed costs, meaning that earnings could surge if there is a rebound in vehicle sales.
Mr. Lache recently bumped up his 2009 earnings forecast to $1.08 from 61 cents previously - a 77-per-cent upward revision that certainly stands out from the rash of downward revisions elsewhere in the corporate landscape.
There's only one problem: AutoNation shares are up a lot, rising far more quickly than most analysts believed they would. Some analysts have been playing catch-up with the stock price, raising their target prices to match the elevated price - but that can be a dangerous game.
If the U.S. economy fails to gain much traction before the end of the year and auto sales remain in a deep funk, AutoNation's stock could stall.
With the stock just $6 from its high of $23 in 2007, it's better to wait for a correction.