DETROIT — AutoNation, the country's largest car dealership chain, made optimistic predictions for the next year as its second-quarter earnings rose 14 percent on strong growth in all of its business units.
Mike Jackson, CEO of the Fort Lauderdale, Fla., company, said the fundamentals are in place for continued auto sales growth in the next year, and that means more strong quarterly earnings for his company.
He says people will be replacing older cars for the foreseeable future, they've gotten used to gas prices around $3.55 per gallon, and he expects short-term interest rates on car loans to stay low despite talk by the Federal Reserve that it could reduce bond-buying activity if the economy improves. The bond buying has kept interest rates down to stimulate growth.
Jackson predicted that total U.S. auto sales would rise to the mid-15 million range this year. "There's a good chance it's going to be on the higher end of that," possibly as high as 15.75 million, Jackson said in a telephone interview Thursday. For the first half of the year, sales ran at an annual rate of about 15.4 million. That's up from 14.5 million last year and a 30-year low of 10.4 million in 2009.
AutoNation's net income was $89.9 million, or 73 cents per share, for the April-June quarter. That compares with earnings of $78.6 million, or 64 cents per share, a year earlier.
Revenue grew 13 percent to $4.43 billion on strong sales of new and used cars as well as parts and service and finance and insurance growth.
The earnings matched Wall Street's expectations, while revenue beat estimates of $4.34 billion, according to analysts polled by FactSet.
But shares of the 266-store chain fell 49 cents, or 1 percent, to close at $44.98 Thursday.
The drop could be due to AutoNation reporting that its gross profit per new vehicle fell 8 percent from a year ago to $1,996.
Chief Operating Officer Mike Maroone said there's pressure on prices due to competition, especially among imported and midsize cars. That pressure was partially offset by sales growth, he said.
In midsize cars, the Detroit Three and Korean automakers Hyundai and Kia each have strong offerings, pressuring the two perennial leaders in the segment, Toyota and Honda. "It's a bit of a price war out there," Maroone said.
The chain saw new vehicle sales rise 11 percent overall and 7 percent compared with stores open at least a year.
During the quarter, AutoNation finished changing all of its dealerships from local names to the AutoNation name, the company said.
For the quarter, AutoNation said new vehicle sales rose 11 percent, and are up 10 percent for the first half of the year. Used car sales were up 13 percent for the quarter and 11 percent in the first half.
Income from AutoNation's Premium Luxury business was up nearly 12 percent to $76 million. Income from dealers selling foreign-based brands was up 9 percent to $73 million. The company's Domestic segment income rose 22 percent to $66 million as Ford, General Motors and Chrysler all reported sales gains for the quarter.
Jackson said consumers may not like gas prices around $3.55 per gallon, but they are getting used to them. The new "freak-out" gas price level that would cause people to buy smaller cars or change their driving behavior is now around $5 per gallon, Jackson said.
The reason that $3.55 per gallon doesn't scare people any more is that companies are making more efficient cars that don't force people to compromise, he said. Larger cars and SUVs now are more efficient because fuel is directly injected into the cylinders around the pistons, transmissions have more gears so engines operate at peak efficiency more often, and turbocharging gives people power even though engines are smaller, he said.
"You don't have to downsize to get the same performance and better fuel economy," Jackson said.
While Jackson wouldn't predict total U.S. sales for next year, he said auto sales should stay strong for several years because people have to replace aging vehicles that they kept through the Great Recession. The average age of a vehicle on U.S. roads still exceeds 11 years. "That's barely budged even with the sales recovery that's underway," Jackson said. "I still think we have years to go in the recovery."
Federal Reserve Chairman Ben Bernanke said Wednesday there is no "preset course" for easing up on bond purchases that have kept interest rates low. He said the U.S. economy is gradually improving and there's no timetable for scaling back policies aimed at jolting growth.
Jackson said he doesn't expect auto loan rates to rise in the next year even as the bond purchases are curtailed, nor does he expect rates to rise for his chain and other dealers who borrow to fund their inventories. The bond purchases, he said, mainly affect interest rates on loans of more than 10 years. Typical car loans are four or five years.
"I see no sign of short-term rates moving in the foreseeable future," Jackson said. "Someday they will, but the economy will be much stronger at that point."
AutoNation also reported that it was granted a new Mercedes-Benz franchise in the Atlanta market. It earlier announced that it got a new Mercedes franchise in Tampa, Fla. Both franchises are expected to open in 2015.
During the second quarter, the company acquired Honda and Hyundai dealerships in Arizona and a Toyota dealer in the Dallas market.