Lithia Motors (LAD)

Last October 2014, I began looking at the auto dealership industry, when this cyclical sector was experiencing a sharp price pullback over several weeks. During my research, the sector’s stock prices suddenly spiked upward, when Berkshire Hathaway announced their acquisition of the largest privately-owned auto dealership (the Van Tuyl Group) and Warren Buffett revealed their intention to acquire more auto dealerships and groups. I made the following post at the Value Hounds board on 10/8/2014,
http://discussion.fool.com/value-candidates-in-auto-dealership-g…
with a follow up primarily addressing high total debt/equity ratios.
http://discussion.fool.com/kelbon-thanks-for-your-usual-thought-…

After conducting in-depth due diligence on all 7 public companies, I decided to invest in Lithia Motors, Inc. (LAD) on 10/16/2014. Since then over a 6-month period, most of these dealerships have realized handsome price gains, in particular, Carmax, Inc. (KMX) and LAD with impressive gains of 61.4% and 44.8%, respectively, as shown in the following table.


     10/16/14  4/8/15	% GAIN	MKT CAP  PE(ttm)  FWD PE
				
KMX	45.88	74.07	61.4%  15.47B     27.01    21.95
LAD	70.08  101.47	44.8%	2.66B     18.97    14.44
PAG	39.24	52.87	34.7%	4.77B     16.54    12.91
AN	48.22	64.81	34.4%	7.36B     18.36    14.48
ABG	63.96	84.93	32.8%	2.34B     22.95    14.69
GPI	72.04	85.91	19.3%	2.01B     23.53    11.35
SAH	22.74	24.99	 9.9%	1.27B     13.40    11.42  

For those interested, here’s a recent LAD investor presentation:
http://www.lithiainvestorrelations.com/201412EarningsPresent…

I had my value investor hat on during my aforementioned due diligence that BTW included a number of this board’s investing criteria (back then I did not follow this board).

Here are some of the latest financial growth trends for LAD:


TOTAL REVENUE
FY 2009    $ 1.74 B
FY 2010      2.13 B
FY 2011      2.69 B
FY 2012      3.31 B
FY 2013      4.00 B
FY 2014      5.39 B  (acquired privately owned DCH Auto Group, Inc.)
-----------------------------------------------
       
ADJUSTED EARNINGS PER SHARE (non-GAAP from 10-K Annual Reports)
FY 2009     $ 0.53
FY 2010       0.93
FY 2011       1.99
FY 2012       2.99
FY 2013       3.99     
FY 2014       5.11     
LAD Guidance:
FY 2015       6.00
FY 2016       7.00
-----------------------------------------------
       
Q4’2013 TO Q4’2014 UPDATE  (LAD investor presentation)
Revenue  Growth   75.0%
Gross Profit      63.9%
Adjusted EPS      44.9%
-----------------------------------------------

Some analysts believe that LAD is a very attractive acquisition target for Berkshire Hathaway. LAD is a third-generation, family controlled and operated business that IMO will not be interested. Instead, LAD will continue to take advantage of the ongoing atuo dealership consolidation trend by judiciously expanding and acquiring other dealerships within their financial means and well-established fiscal discipline.

Lithia Motors (LAD) nicely fits in my investment portfolio with its easy-to-understand, easy-to-follow business model.

There are some other worthy choices in this sector, so as always, conduct your own due diligence.

Regards,
Ray

9 Likes

Thanks Ray. Say how do these businesses tend to fare in a recession? I assume it’s bad… but how bad.

utahchris: how do these businesses tend to fare in a recession? I assume it’s bad… but how bad.

Chris,

Take a look at the “Profitability and SAAR” graph on Page 8 of the LAD Investor Presentation which compares the annual Peer Group Pre-Tax Income (PTI) percentages with the Seasonally Adjusted Annual Rate (SAAR) growth percentages from 2007 to 2014. The Peer Group includes Lithia, AutoNation, Penske, Sonic, Asbury and Group 1 and excludes Carmax. The purpose of this graph is to show that the Peer Group has been recession-tested, showing positive PTI percentages of 2%, 1.9% and 1.5% versus negative SAAR growth percentages of -3%, -18% and -21% for recession years 2007, 2008 and 2009, respectively.
http://www.lithiainvestorrelations.com/201412EarningsPresent…

Also on Page 9, a “Historical New Vehicle SAAR Performance” graph from the U.S. Dept. of Commerce BEA shows that SAAR performed above the long-run average after three recessionary periods in the 1976-2013 time frame.

Regards,
Ray