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Today I bought stock in Lithia Motors (LAD) at a price of 340.11. I will sell it in 4 – 6 weeks at 393.51. Here’s why I like LAD.
First of all, we must look at the chart.
Despite the challenging times we are in, this stock is up 142% over the past 52 weeks (compared to the S&P 500 18%) while maintaining a PE ratio of only 22. How does this stock do it? It’s about the earnings earnings earnings.
Lithia Motors is a leading operator and retailer in the highly fragmented automotive industry. Lithia sells new and used cars and light trucks, sells replacement parts, provides vehicle maintenance, warranty, paint and repair services, and arranges related financing and insurance for its automotive customers. This company also pays a nice dividend of 1.2% while its earnings have shown acceleration.
After an 18% dip in profit to $2.01 a share in the first quarter of 2020, the company's bottom line grew 26% and 103% in the next two quarters. Sales picked up speed again in Q3 of last year, up 9% to $3.62 billion after two straight quarters of year-over-year declines.
Last quarter, LAD came out with quarterly earnings of $6.89 per share, beating ANAL-yst estimates of $6.21 per share. This compares to earnings of $3.39 per share a year ago. This quarterly report represents an earnings surprise of 10.95%. A quarter ago, it was expected that this auto dealership chain would post earnings of $1.51 per share when it actually produced earnings of $3.72, delivering a surprise of 146.36%. Over the last four quarters, the company has surpassed consensus EPS estimates three times.
Lithia Motors has managed to grow EPS by 23% per year over three years. That’s remarkable for a company with a 9 billion dollar market cap and revenues in excess of 12 billion. That means that as long as its earnings continue to follow the existing trend, this stock will stay at a great value and will continue to be attractive to investors.
Walt DeBoer founded Lithia Motors in 1946 as a Chrysler-Plymouth-Dodge dealership in Ashland, Oregon. Following Walt’s death in 1968, Walt’s son Sid along with Dick Heimann, grew the business to include 5 stores and 19 franchises in Southern Oregon. In December 1996, this collection of dealerships was transformed into Lithia Motors, Inc., a company that would continuously grow, provide great customer service, and opportunities for employees.
Lithia is one of America’s largest automotive retailers featuring most domestic and import franchises. Their stores serve urban and rural populations throughout the Western and Midwest United States. They believe that local communities are their lifeblood.
Given our nation’s unemployment crisis, thinking about investing in automobile sales can make you very nervous, but all we are really looking at is the distribution system. It’s a one trillion dollar business, and the dealers make money for each car that gets pushed through. They don’t have to worry about design, government safety standards or expensive unions and outrageous pay benefits. All a dealer has to do is receive the cars and sell them. As of the end of its 2019 fiscal year, the company owned 188 retail locations. At that time, the company had a location operated within a short distance of 92% of Americans. It’s all about the Vig.
They are particular with the type of dealerships they buy up. They are focused on mid-sized, regional markets for domestic and imported vehicles and metropolitan markets for luxury vehicles. Their insulation from competition gives them pricing protection. They are adding growth by expansion and roll ups and the revenue growth story seems to be enabling its stock price, while allowing them to increase their dividend. The company made approximately a quarter billion dollars in net profit in the third quarter from dealership acquisitions, which sets up the company well to purchase more in the future. It’s a lot better than putting your money in a CD right now. There is plenty more room to grow. It’s a $2 trillion dollar industry, so Lithia can keep taking little nibbles every year.
The scale advantage over their fragmented competitors means that LAD can use centralized admin functions and common measurement metrics. They can have best in class information systems and can standardize sales training and customer service processes.
They have been crushing it recently on used car sales and service, where the net margins far exceed that on new car sales. With interest rates so low forever, buying a used car is something many people can do these days. An important driver of the recovery in auto sales is the expansion of consumer credit, particularly for lower-tier customers. Consistent with the past few quarters, lenders have shown their commitment to increasing their portfolio of automotive loans and are loosening their lending criteria to accomplish this objective. As new car sales flatten, used car sales are taking their place. Hey, I have never bought a new car. I love buying used Caddy DTS’s.
People are moving out of the cities…that means more suburban living and more miles being put on the road. That’s good for Lithia. The rising tide is coming with all of the government stimulus and eventual full deployment of the vaccine. It’s great to own a stock that has momentum and still carries value. A stock like LAD. The company plans on competing with Carvana by first launching its Driveway.com strategy, which is an e-commerce solution. Driveway.com lets customers purchase or sell vehicles online and schedule at-home services.
The company has a 1-year ROE of 23.0%, which is higher than its peer group average. It also has a PEG ratio of 0.57, which is less than 1 and indicates that the stock is reasonably valued given yoy earnings growth of 86%.
Third Quarter-over-Quarter Operating Highlights:
Here’s what their boss had to say:
"Our strong used vehicle performance and sequential improvements in service, body and parts throughout the quarter, coupled with our strategic cost saving measures taken earlier in the year, led us to the highest quarterly earnings per share in our company's history, more than doubling our adjusted earnings per share compared to the third quarter of last year," said Bryan DeBoer, President and CEO. "This record performance and profitability demonstrate the high performance being achieved at our existing stores and only the very beginning of the benefits to be realized through the activation of Driveway, our ecommerce digital home solution."
I don’t care what kind of car you buy next, but if you’re going to buy one in the Lithia parking lot then that’s going to work for me! I am HUGE!
$$$MR. MARKET$$$
First of all, we must look at the chart.
Despite the challenging times we are in, this stock is up 142% over the past 52 weeks (compared to the S&P 500 18%) while maintaining a PE ratio of only 22. How does this stock do it? It’s about the earnings earnings earnings.
Lithia Motors is a leading operator and retailer in the highly fragmented automotive industry. Lithia sells new and used cars and light trucks, sells replacement parts, provides vehicle maintenance, warranty, paint and repair services, and arranges related financing and insurance for its automotive customers. This company also pays a nice dividend of 1.2% while its earnings have shown acceleration.
After an 18% dip in profit to $2.01 a share in the first quarter of 2020, the company's bottom line grew 26% and 103% in the next two quarters. Sales picked up speed again in Q3 of last year, up 9% to $3.62 billion after two straight quarters of year-over-year declines.
Last quarter, LAD came out with quarterly earnings of $6.89 per share, beating ANAL-yst estimates of $6.21 per share. This compares to earnings of $3.39 per share a year ago. This quarterly report represents an earnings surprise of 10.95%. A quarter ago, it was expected that this auto dealership chain would post earnings of $1.51 per share when it actually produced earnings of $3.72, delivering a surprise of 146.36%. Over the last four quarters, the company has surpassed consensus EPS estimates three times.
Lithia Motors has managed to grow EPS by 23% per year over three years. That’s remarkable for a company with a 9 billion dollar market cap and revenues in excess of 12 billion. That means that as long as its earnings continue to follow the existing trend, this stock will stay at a great value and will continue to be attractive to investors.
Walt DeBoer founded Lithia Motors in 1946 as a Chrysler-Plymouth-Dodge dealership in Ashland, Oregon. Following Walt’s death in 1968, Walt’s son Sid along with Dick Heimann, grew the business to include 5 stores and 19 franchises in Southern Oregon. In December 1996, this collection of dealerships was transformed into Lithia Motors, Inc., a company that would continuously grow, provide great customer service, and opportunities for employees.
Lithia is one of America’s largest automotive retailers featuring most domestic and import franchises. Their stores serve urban and rural populations throughout the Western and Midwest United States. They believe that local communities are their lifeblood.
Given our nation’s unemployment crisis, thinking about investing in automobile sales can make you very nervous, but all we are really looking at is the distribution system. It’s a one trillion dollar business, and the dealers make money for each car that gets pushed through. They don’t have to worry about design, government safety standards or expensive unions and outrageous pay benefits. All a dealer has to do is receive the cars and sell them. As of the end of its 2019 fiscal year, the company owned 188 retail locations. At that time, the company had a location operated within a short distance of 92% of Americans. It’s all about the Vig.
They are particular with the type of dealerships they buy up. They are focused on mid-sized, regional markets for domestic and imported vehicles and metropolitan markets for luxury vehicles. Their insulation from competition gives them pricing protection. They are adding growth by expansion and roll ups and the revenue growth story seems to be enabling its stock price, while allowing them to increase their dividend. The company made approximately a quarter billion dollars in net profit in the third quarter from dealership acquisitions, which sets up the company well to purchase more in the future. It’s a lot better than putting your money in a CD right now. There is plenty more room to grow. It’s a $2 trillion dollar industry, so Lithia can keep taking little nibbles every year.
The scale advantage over their fragmented competitors means that LAD can use centralized admin functions and common measurement metrics. They can have best in class information systems and can standardize sales training and customer service processes.
They have been crushing it recently on used car sales and service, where the net margins far exceed that on new car sales. With interest rates so low forever, buying a used car is something many people can do these days. An important driver of the recovery in auto sales is the expansion of consumer credit, particularly for lower-tier customers. Consistent with the past few quarters, lenders have shown their commitment to increasing their portfolio of automotive loans and are loosening their lending criteria to accomplish this objective. As new car sales flatten, used car sales are taking their place. Hey, I have never bought a new car. I love buying used Caddy DTS’s.
People are moving out of the cities…that means more suburban living and more miles being put on the road. That’s good for Lithia. The rising tide is coming with all of the government stimulus and eventual full deployment of the vaccine. It’s great to own a stock that has momentum and still carries value. A stock like LAD. The company plans on competing with Carvana by first launching its Driveway.com strategy, which is an e-commerce solution. Driveway.com lets customers purchase or sell vehicles online and schedule at-home services.
The company has a 1-year ROE of 23.0%, which is higher than its peer group average. It also has a PEG ratio of 0.57, which is less than 1 and indicates that the stock is reasonably valued given yoy earnings growth of 86%.
Third Quarter-over-Quarter Operating Highlights:
- Total company revenues increased 8.6%
- Same store used vehicle retail sales increased 11.2%
- Same store F&I per unit increased 9.8% to $1,617
- Same store total vehicle gross profit per unit increased 28.0% to $4,690
Here’s what their boss had to say:
"Our strong used vehicle performance and sequential improvements in service, body and parts throughout the quarter, coupled with our strategic cost saving measures taken earlier in the year, led us to the highest quarterly earnings per share in our company's history, more than doubling our adjusted earnings per share compared to the third quarter of last year," said Bryan DeBoer, President and CEO. "This record performance and profitability demonstrate the high performance being achieved at our existing stores and only the very beginning of the benefits to be realized through the activation of Driveway, our ecommerce digital home solution."
I don’t care what kind of car you buy next, but if you’re going to buy one in the Lithia parking lot then that’s going to work for me! I am HUGE!
$$$MR. MARKET$$$
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