We met about Lithia Motors, Inc. The Bullish Paper (LAD) is replaced on Chit Chat Stocks. In this article, we will summarize the Bulls’ paper on the lad. As of May 7Th. According to Yahoo Finance, LAD's lagging and forward P/E are 9.34 and 8.51, respectively.
The large car dealership has a wide view, and its showrooms are equipped with different types of cars.
Lithia Motors is a quiet compound in the scattered U.S. auto dealership field, establishing a decades-long record of shareholder value creation. As the largest auto retailer in North America, since its IPO in 1996, Lithia has nearly 500 locations and over 50 vehicle brands in the U.S. and Canada each year, aggravating returns at a rate of 13.5% each year, accounting for 9% of the S&P 500 points in the same period. Despite its size, it accounts for only 1.5% of the market share in the industry with over 17,000 dealerships, providing a long-term growth runway through its reliable roll-up strategy. Lithia has already established relationships with many of these dealers, and like Constellation software, it patiently waits for the right time to strike, leveraging years of basic work with potential sellers. The company's acquisition model focuses on rural dealers, which is often geographically exclusive due to contractual restrictions from original equipment manufacturers (OEMs), essentially the Lithia local moat has the lowest risk of direct competition risk. Additionally, Lithia's size allows it to centralize backend operations, transfer inventory across its footprint and alleviate brand-specific cyclicality due to its extensive brand exposure.
Contrary to popular assumptions, auto sales drive dealer profitability, and Lithia generates approximately 65% of its gross profit from high profits and recurring services such as parts, repairs and financing. When auto sales decline, the segment provides buffering during the slowdown, giving businesses a built-in defensive feature. The acquisition is conducted in attractive multiples – especially 0.25 times sales, with a revenue of about 6 times given Lithia's operating margin of 4%. This has resulted in consistent, strong returns for invested capital and strong EPS growth. One of the main reasons these returns have not yet competed is that the dealer model is closed. OEMs must approve the sale of dealers, and Lithia has become the reputation of value-added buyers for OEMS Trust. They can show a proof of increased quantity and efficiency, thus giving them a competitive advantage over private equity or inexperienced operators.
Despite its operational advantages and acquisition capabilities, Lithia’s revenue is not 9 times higher due to multiple risks (such as the rise of the online used car market), which may erode Lithia’s customer channels; even if vehicle sales are not the company’s profit engine, they can serve as a key entry point for long-term customer relationships to integrate into its profitable services and financing products. If the online platform destroys the initial customer capture, it may affect downstream profitability. Another structural concern is the rise of electric vehicles (EVs), which have much less maintenance than internal combustion vehicles are required. Repairs and parts represent a considerable portion of Lithia's gross profit, and if EV penetration accelerates rapidly, the company may eventually see some edge compression.
Interest rate sensitivity adds another layer of investor hesitation. Lithia's business model relies heavily on acquisitions, and its balance sheet is subject to corresponding measures, with EBITDA's net debt of 7 times. In a high interest rate environment, both consumer demand and Lithia's capital cost are under pressure, making acquisitions of debt income more expensive and reducing transaction traffic. However, the company has shown resilience in past downturns, maintaining a positive operating margin even when profit margins fell to just 2% during the 2008 major financial crisis. Most of Lithia's cost structures are variable, such as sales commissions, which can be flexible under economic pressure. Furthermore, as weaker dealers suffer, recessions tend to create buying opportunities, allowing Fucia to dig out assets and expand its moat at a lower price.
Ultimately, Lithia Motors offers compelling long-term investment opportunities. The stock has a durable and cash-created business model, structurally advantageous acquisition strategies and a massive merger runway, and in a fragmented industry, the stock proposes asymmetric risk/reward situations.
Lithia Motors, Inc. (LAD) is not on our list The 30 Most Popular Stocks in Hedge Funds. According to our database, at the end of the fourth quarter, 45 hedge fund portfolios held Lads in the fourth quarter of the previous quarter. Although we acknowledge the risks and potential of LAD as an investment, our belief is that certain AI stocks have greater hope and offer higher returns in a shorter time frame. If you are looking for AI stocks that are more promising than LAD but have less than 5 times the gains, check out our report on this report Cheapest AI stocks.
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Disclosure: None. This article was originally published in Insider Monkey.