Analyst Note| David Whiston, CFA, CPA, CFE |
Lithia reported record first-quarter results with adjusted diluted EPS of $5.89 beating the Refinitiv consensus of $4.76. Total revenue increased 54.9% year over year while same-store revenue rose by 27.6% with all segments except service (which fell by 1%) posting about 30% growth. Service continues to suffer from a decrease in miles driven from the pandemic, but we feel maintenance can only be deferred not canceled, so we expect a recovery next year at the latest. Healthy gross profit increases from low inventory giving Lithia pricing power should in our view continue to drive profit growth until at least the second half of the year. We are leaving our fair value estimate in place and continue to model Lithia acquiring $6 billion of annual revenue in 2021. The recently announced acquisition of The Suburban Collection in the Detroit area, one of the larger U.S. dealer groups and a new market for Lithia, adds annualized revenue of $2.4 billion and is a large step toward Lithia’s expansion to $50 billion of revenue and $50 EPS by 2025. Management also announced a 13% quarterly dividend increase to $0.35 per share. We believe shareholders should expect equity dilution to fund some growth based on management saying on the call it is willing to issue shares for a deal, or if need be to get the leverage ratio below 3 times EBITDA, but $50 EPS is such large growth that we don’t mind some dilution to get there. Net debt to EBITDA is only 1.67 times at March 31.