UPDATE 2-AutoNation posts profit on cost-cutting, Clunkers

* EPS from continuing ops $0.36; Street view $0.35

* Revenue down 15 pct to $2.9 billion

* Cost-cutting, "Cash for Clunkers" boost results

* Shares up 2 percent (Adds CEO remarks, outlook, details on impact from government incentive program,

DETROIT, Oct 29 (Reuters) - AutoNation Inc (AN.N), the largest U.S. auto retailer, posted a quarterly profit thanks to cost-cutting and the government's "Cash for Clunkers" incentive program and said it would target dealership acquisitions as the market recovers.

The company, which has been slashing inventory and costs to ride out the slump in auto sales, also said its board approved plans to increase investment in its showrooms by 65 percent in 2010 and to buy back up to an additional $250 million in stock.

Third-quarter net earnings were $65 million, or 36 cents per share, compared with a loss of $1.4 billion, or $7.99 per share, a year earlier.

AutoNation said the "Clunkers" program, which offered credits of up to $4,500 on new cars purchased this summer if consumers traded in older, less fuel-efficient cars, boosted third-quarter earnings by 7 cents per share.

Revenue for the quarter dropped 15 percent to $2.9 billion, in line with the slump in U.S. auto sales.

Earnings topped analysts' average forecast of 35 cents a share, according to Thomson Reuters I/B/E/S. Analysts had forecast revenue of $3.1 billion.

AutoNation shares rose 2 percent in premarket trade to $18.50.

Billionaire investor Edward Lampert's ESL Investments owned almost 45 percent of AutoNation as of the end of June, according to a regulatory filing.

GETTING BACK TO 'A GOOD OLD RECESSION'

AutoNation Chief Executive Mike Jackson said he expects U.S. auto sales to recover gradually starting next year, from "depression levels" of just over 10 million vehicles expected for 2009. He forecast 2010 sales of over 11 million vehicles.

Jackson said he was encouraged by "signs of life" in the market for financing near-prime and subprime borrowers and for underwriting vehicle leases. Those riskier areas of the auto market had been shut down by last year's credit crisis.

"We're optimistic. We're looking at five to six years of growth," Jackson told Reuters. "Eleven million (auto sales) is still a depression, but it's certainly better than 2009. We can probably get back to a good old recession in 2011."