AutoNation Inc.

S&P Global Ratings' stable rating outlook on AutoNation Inc. reflects the assumption the company's variable cost structure and extensive control systems--combined with its diverse revenue streams, geographic diversity, and brand mix--will enable it to generate credit ratios in line with the current rating over the next two years. Specifically, we expect AutoNation will pursue a financial policy that balances business expansion and shareholder returns, with debt leverage below 3x and FOCF to debt of 15% or higher on a sustained basis. We could lower the rating on AutoNation during the next two years if its leverage rose above 3x for an extended period. We could also lower the rating if the company's FOCF-to-debt ratio were sustained at less than 15%.

...AutoNation, Inc.'s business model has diverse revenue streams, which should partially offset the risk of a decline in new car sales. As an auto retailer, its revenue sources include sales of new and used vehicles, parts and services (P&S), and finance and insurance products. While most revenue comes from vehicle sales, P&S contributes over 45% of gross profit. This model has the beneficial effect of providing recurring revenue and acts as a stabilizing force, which is especially helpful during economic downturns. The company is focused on reducing its cost structure to navigate profit pressures arising from declining vehicle demand or the effect of rising prices. Selling, general, and administrative (SG&A) expenses as a percentage of gross profit declined to 71.5% in the second quarter due in part to its restructuring and cost savings plan announced in January 2019, and a decrease in one-time expenses relating to its extension strategy. We expect the company to reduce debt leverage in 2019...

Full Report