Lithia Earnings: Long-Term Growth Story Continues to Look Excellent to Us

Lithia’s LAD third-quarter adjusted diluted EPS of $9.25 fell 16.5% year over year and missed the Refinitiv consensus of $10.08, but we don’t see anything in the results to merit a fair value estimate change. We still see Lithia’s growth runway as excellent, as the firm continues to expand at an aggressive rate via acquisitions and has many new end markets to pursue long-term, such as its Driveway Finance captive finance arm, electric vehicle charging, fleet management, and a dealer management system joint venture with Pinewood Technologies as part of the pending acquisition of U.K. dealer Pendragon (see our Sept. 18 and Oct. 2 notes). Pendragon announced on Oct. 25 that its shareholders have overwhelmingly approved the deal, so the final hurdle is approval from U.K. regulators. The deal is still expected to close before year-end. The North American DMS joint venture with Pinewood is likely to launch in about two years, per CEO Bryan DeBoer, as Pinewood needs time to have data links with all 50 U.S. state motor vehicle departments.

Demand remains healthy, as evidenced by 5.5% growth in same-store new-vehicle volume and 5% same-store new-unit growth. However, used vehicles continue to suffer from an affordability problem brought on by low supply from the pandemic and the chip shortage as well as high interest rates. Same-store used retail revenue fell 8.1% and units declined 2.1%, which helped lead to a total same-store revenue decline of 1.1% versus a consolidated revenue increase of 13.5%. Same-store new- and used-vehicle gross profit fell 22.3% and 18.8%, respectively, as new-vehicle profits come down from abnormally high levels brought on by the chip shortage. New-vehicle gross profit per unit declined 26% to $4,308 on a same-store basis. These declines combined with a small $4.4 million loss from Driveway Finance caused deleveraging of overhead costs, and adjusted operating margin fell 110 basis points to a still very good 5.5%.