Lithia Motors Inc Class A LAD

Lithia Earnings: Soft Start to 2024 Does Not Take Away From the Attractive Long-Term Growth Runway

Lithia Motors' first-quarter results suffered from gross margin coming in lower than were modeling for the full year. Adjusted diluted EPS of $6.11 fell 27.6% year over year and missed the $7.89 LSEG consensus. After the February close of the Pendragon deal in the UK, which is a region that has less lucrative financing operations than US dealers, in the April 24 slide deck management lowered its so-called “future state” (think 2030s) long-term operating margin target by 200 basis points to over 5% from 7%. We include floorplan interest in our midcycle operating margin number, and we have lowered our midcycle operating margin by 30 basis points to 4.2%. These changes reduce our fair value estimate by 11% to $445 from $500. Although this is a large valuation cut, we still find Lithia’s long-term growth story very attractive; however, we think our valuation is one that the stock will need beyond 2024-25 to grow into.