DETROIT - AutoNation Inc, 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.

Like other auto retailers, AutoNation cut inventory sharply to reduce financing costs this year. It ended the third quarter with 47 days supply of new vehicles, down from 60 days a year earlier.

Sales of new and used vehicles accounted for 77 percent of AutoNation's revenue in the quarter but only 34 percent of its gross profit. The more profitable repair and financing and insurance operations accounted for 63 percent of gross profit.

Fort Lauderdale, Florida-based AutoNation operates 245 auto franchises in 15 states.

Jackson said the company was ready to go on the offensive and would bid for new dealerships, including Chevrolet and Ford Motor Co (F.N) stores, adjusting a strategy that has favored import and luxury brands.

He said he would not make a judgment on whether to invest in Chrysler franchises until after seeing the company's turnaround plan, scheduled to be announced next week.

Both General Motors Co and Chrysler went through U.S. government-financed bankruptcies. That process put Chrysler under the management control of Fiat SpA.

I think Chrysler has the biggest challenge, Jackson said. We have to see what the product plan is for the next five years. The old product plan was torn up and a new one has been created. Until I see that, it's hard to make a judgment. (Reporting by Kevin Krolicki, editing by Gerald E. McCormick and John Wallace)

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