AutoNation Gets It In Gear

AutoNation (AN Quote - Cramer on AN - Stock Picks) has shifted out of reverse.

After backsliding in recent quarters, the nation's largest auto dealer zoomed past Wall Street expectations Thursday by delivering the most profitable second quarter in company history. The giant auto chain easily topped its own guidance, lowered in April to between 29 cents and 31 cents a share, with second-quarter profits of 37 cents. So Wall Street, which had been looking for 30 cents on average, enjoyed an upside surprise from a company already known for handily beating expectations.

Even a former AutoNation critic, who bet against the stock earlier this year, said he was impressed.

"The used car market is bouncing off the bottom, which is helping, and the company continues to do well on costs," the hedge fund manager said. "The results look strong."

Encouraged by the turnaround, AutoNation hiked its full-year guidance -- lowered just three months ago -- by 7 cents to between $1.28 and $1.33 a share. The company also offered third-quarter guidance of up to 36 cents a share, which would beat current estimates by 2 cents.

AutoNation CEO Mike Jackson did offer some words of caution, however.

"While we are hopeful that efforts to stimulate the economy will take hold," he said, "we believe that the auto retail environment will remain challenging for the remainder of the year.

Still, AutoNation has already shown dramatic improvement from a weak first quarter that brought declines in nearly every major category. The company was able to report a slight jump in revenue -- up 1% to $5.07 billion -- and a 2% increase in net income to $106 million.

But aggressive cost-cutting and share repurchases -- a strategy questioned by some -- really drove EPS growth. By trimming expenses another full percentage point, the company managed to report its third-straight quarter of margin improvement. And stock buybacks totaling $149 million reduced outstanding shares by 4%.