UPDATE 2-AutoNation posts profit, says recovery underway

* Adjusted EPS 38 cents/shr vs Street view 36 cents

* Revenue up 20 pct to $3.1 bln

* CEO sees solid US economic recovery, higher Q3 sales (Adds detail on quarterly results, share price, analyst comments, byline)

By Kevin Krolicki

DETROIT, July 22 (Reuters) - AutoNation Inc (AN.N), the biggest U.S. auto retailer, posted a stronger-than-expected quarterly profit on Thursday on a 20 percent gain in revenue, as car and truck sales bounced back in key markets like California and Florida.

AutoNation's earnings were also boosted by cost-cutting while profit on a per-share basis was lifted by $414 million in share buybacks, about 12 percent of outstanding shares.

Shares in the Fort Lauderdale, Florida-based retailer were up 6 percent on Thursday afternoon to $22.55. The stock has gained more than 15 percent this month.

AutoNation Chief Executive Mike Jackson said he expects the current quarter's industrywide annualized U.S. sales rate to top 11.5 million vehicles, pointing toward a sustained but still slow-moving economic recovery.

(Graphic: link.reuters.com/gum98m)

"For the recovery to hit its stride, you're going to need higher levels of employment and stability around housing, which I don't think you can get this year," Jackson told analysts on a conference call to discuss AutoNation earnings.

"I think it's just going to take more time," he said.

Net income in the second quarter rose to $47.2 million, or 29 cents a share, compared with $36.7 million, or 21 cents a share, in the year-earlier quarter.

Excluding one-time items, earnings from continuing operations were 38 cents a share, 2 cents above what analysts polled by Thomson Reuters I/B/E/S had expected.

Revenue rose 20 percent to $3.1 billion, compared with an industry-wide retail sales growth rate of about 10 percent.

BUYING DEALERSHIPS, BUYING SHARES

AutoNation also said on Thursday that it has reached a deal to buy three new locations: an Atlanta-area Toyota Motor Corp (7203.T) and Hyundai Motor Co (005380.KS) dealership and another Hyundai store in Seattle.

Chief Operating Officer Mike Maroone said AutoNation is looking to acquire other dealerships, including domestic auto brands, and is encouraged by signs that owners are more willing to lower their asking price for franchises.

"There's a lot more acquisition activity, a lot more discussion going on," he said.

AutoNation dealerships with U.S. auto brands -- led by Ford Motor Co's (F.N) namesake brand and by General Motors Co's [GM.UL] Chevrolet -- saw sales jump by almost 30 percent, a bigger gain than for Japanese auto brands or for luxury cars.

Toyota represented the company's largest share of new car sales at 19 percent, while Ford replaced Honda Motor Co Ltd (7267.T) as its second-best selling brand.

AutoNation bought back almost 21 million shares in the past quarter, spending almost all of the funds budgeted for stock repurchases. The board this week approved the repurchase of another $250 million of common stock.

Those steps "should notably aid future earnings," said JPMorgan analyst Himanshu Patel in a note for clients.

Ravi Shanker, an analyst with Morgan Stanley, said investor sentiment on auto dealers had "turned bearish" because of concerns about the pace of economic recovery.

But he said in a note for clients that dealership operators like AutoNation would be able to make up for any slack in new car sales with gains from higher-margin repair operations and price increases on new and used cars.

"We also expect the pace of (sales) to pick up meaningfully in the second half," Shanker said.

AutoNation's Jackson said the dealership's July sales to date have been consistent with his view that the third quarter will see sales growth from year-earlier levels that had been boosted by the government's cash-for-clunkers stimulus program. (Additional reporting by Ben Klayman, editing by Gerald E. McCormick)