Is Lithia Motors Stock a Buy? Lithia Motors (NYSE:LAD) is one of the fastest growing automotive retailers in the US. The company just reported another record breaking quarter, with increasing sales and rising cash flows just two of the many highlights the Oregon-based dealership can boast about.
And yet, despite this raft of positive developments, the firm’s share price is down almost 25% the last twelve months. There are certainly explanations for this, not least the fact that the US auto industry tanked in 2021, with sales hitting lows not seen since as far back as 2012.
Nevertheless, a rally in car prices later in the year helped retailers and manufacturers beat profit predictions across the board, even if the volume of actual cars leaving the forecourts was significantly reduced.
This appears to have given Lithia’s shareholders little consolation however, with investors exiting the stock in droves lately.
But is this a rational response?
The company still has plenty to recommend it, and by almost any measure remains in a good position going forward. We examine this fascinating business, and find out why exactly LAD remains a solid value proposition today.
Tough Times For The Automotive Market
It’s news to no-one at this point that the worldwide squeeze on semiconductor parts has impacted the automotive industry in a big way. Car manufacturers had to curtail their output as production lines came to a stop, while retailers also faced a knock-on effect with fewer new models available for sale.
But not all segments of the industry fared as poorly as the others. For instance, the sector’s more tech-heavy brands suffered particularly badly, with some famous names such as Elon Musk’s Tesla, and battery maker Panasonic, losing double digits in value since the start of the year.
Indeed, the wider tech sell-off decimated many previously high-flying companies. Carvana, the fastest growing online-only used car retailer, lost a panic-inducing 85% of its worth, while Cars.com – which recently delivered full-year double-digit revenue growth – fell more than 30% during the same period.
However, Lithia is a traditional brick-and-mortar auto retailer, and might have expected to be insulated somewhat from the headwinds that afflicted so many of its competitors.
But despite increased demand for its products arising from constraints on the automotive supply chain, investors just don’t seem that excited for the business. Even the reopening of the economy after COVID-19 lock-down restrictions hasn’t energized the market sentiment for Lithia all that much.
Source: Unsplash
A Very Good Quarter
No matter – if investors aren’t interested in LAD today, they sure will be pretty soon. The company had a bumper Q1 results haul, with almost too much good news to speak of.
To begin with, the firm increased its revenue by 54% year-on-year, bringing in a total sales tally for the period of $6.71 billion. This beat Wall Street estimates by $370 million, helping contribute to its annual overall growth of 72%.
New vehicle revenues were up 39.6%, while used vehicle sales rose a massive 65.2% – a development that suggests customers are fine with second-hand automobiles if the industry isn’t willing or able to provide them with new ones.
Lithia’s online segment, Driveway, also had a good quarter too. The business now enjoys 1 million unique visitors every month, and its credit wing, Driveway Finance, became the firm’s #1 lender to Lithia’s customers – hitting a 6.2% penetration rate in the process.
Most importantly, perhaps, is that Driveway’s quarterly transaction volumes spiked more than 1,000%, with 3,100 transactions executed during March alone.
On the profit front, LAD’s non-GAAP EPS of $11.96 exceeded estimates by $1.62, with its total gross profit per vehicle increasing 55.4% to $6,825. The company’s free cash flow yield is excellent at 18.2%, while its year-on-year EBITDA growth is a staggering 122%.
Furthermore, Lithia’s trailing twelve month (TTM) operating income appears to be exploding upwards, rising from just over $500 million in the middle of 2020, to a little under $2 billion today.
The company is also becoming more efficient when it comes to costs as well, with its SG&A as a fraction of gross profit improving 550 bps from 62.6% to 57.1%.
Margins Are Low
With the company putting up such great quarterly numbers, you might be wondering why Wall Street isn’t flocking to the business right now.
The truth is, some analysts and investors view the firm’s shallow profit metrics as something of a warning. Lithia’s gross margin is low at just 19.1%, while its operating profit fraction trails behind the wider consumer discretionary industry at only 8.37%.
However, LAD’s peers in the auto retail sector are all performing pretty much on par at this point in time. AutoNation’s figures for the above metrics are almost exactly the same as Lithia’s, while Carvana isn’t profitable on a TTM basis at all.
Is Lithia Motors Stock a Buy?
It says something of the quality and aspirations of the company that, in a record breaking quarter, Lithia’s management actually reported weaker than anticipated sales overall.
This shouldn’t deter investors one bit; if anything, it’s a signal of how determined the business is to perform to its absolute best.
For investors, you need only look at LAD’s P/E ratio to get a sense of how cheap this stock is. Indeed, its forward GAAP multiple of 5.92 puts the sector median of 12.6 to shame – and should be a green flag to buy for any potential shareholders out there.
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