Lithia Earnings: We Don’t See Growth Plans in Jeopardy
We are not changing our Lithia Motors LAD fair value estimate despite first-quarter results that missed Refinitiv consensus. We don’t see Lithia’s 2025 EPS story of $55-$60 on $50 billion in revenue in danger of not happening. Management has long said it expected profits to come down from recent levels as new vehicle profitability has been turbocharged from the chip shortage reducing supply. Adjusted diluted EPS of $8.44 missed the $8.77 consensus and fell 29% year over year. Same-store revenue fell 5.1% with all segments declining except service, which grew 9.4%. Same-store unit volume fell 6.3% for new vehicles and 2.4% for used vehicles, while those segments’ gross profit per unit declined by 19.7% and 30.3%, respectively. New vehicle profits are slowly returning to a more normalized level from the chip shortage highs, while used profits remain difficult for retailers due to expensive inventory acquisition costs and poor consumer affordability.
At a consolidated level, however, we don’t consider Lithia’s results to be poor. Operating margin—including floorplan interest expense of 5.1%—though down 240 basis points by our records, is still very strong, in our opinion. Also noteworthy is management increasing the quarterly dividend by 19% to $0.50, which we take as a sign of the team not worried about the future. Total liquidity from cash and credit lines is $1.4 billion, plus management estimates another approximately $500 million could be raised from mortgaging unencumbered real estate. Management expects more new vehicle incentives from the automakers to come later this year that can help leverage Lithia’s overhead costs and bring more retail customers back into the market. More customers also mean more loan origination opportunities for Lithia’s captive lending arm, Driveway Finance Corp., which had penetration in the quarter of over 14% and is the firm’s largest lender for customers. DFC is expected to reach profitability in late 2024.
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