LAD Stock Study (7-17-24)

Posted by Mark on September 4, 2024 at 06:44 | Last modified: July 17, 2024 10:17

I recently did a stock study on Lithia Motors, Inc. (LAD) with a closing price of $275.87.

M* writes:

     > Lithia Motors is a retailer of new and used vehicles and related
     > services. The company offers about 50 brands of vehicles at nearly
     > 500 stores globally across the US, Canada, and UK. The company has
     > expanded largely through the acquisition of dealerships in smaller
     > regional markets but now seeks to grow in any part of the US and we
     > expect more deals over time in the US and, at times, abroad. Annual
     > revenue in 2023 was $31 billion and we see over $50 billion possible
     > in a few years. The US was 90% of 2023 revenue and the UK second
     > at 6%, the latter should rise significantly with the Pendragon
     > acquisition. In 2023, new-car sales were about 49% of total revenue.
     > Lithia was founded in 1946, went public in 1996, and is the largest
     > US auto dealer. It is based in Medford, Oregon.

Over the past 10 years, this large-size company has grown sales and EPS at annualized rates of 20.2% and 27.8%, respectively. Lines are mostly up, straight, and parallel except for an EPS decline in ’23. Despite the latter, 5-year R^2 is 0.77.

Over the past decade, PTPM is about even with the industry and leading peer averages while ranging from 2.9% in ’18 to 6.5% in ’21 with a last-5-year mean of 5.0%. ROE leads peer and industry averages despite falling from 21.6% (’14) to 16.6% (’23) with a last-5-year mean of 23.0%. Debt-to-Capital is less than peer and industry averages by falling from 73.0% (’14) to 64.6% (’23) with a last-5-year mean of 62.0%.

Value Line gives a B grade for Financial Strength [down from B++ in Feb 2023]. Quick Ratio per M* is only 0.25 and Interest Coverage is 4.0. M* gives a “Standard” rating for Capital Allocation.

With regard to sales growth:

• YF projects YOY 17.4% and 9.3% for ’24 and ’25, respectively (based on 14 analysts).
• Zacks projects YOY 15.8% and 8.4% for ’24 and ’25, respectively (5 analysts).
• Value Line projects 7.2% annualized growth from ’23-’28.
• CFRA projects 19.1% YOY and 13.5% per year for ’24 and ’23-’25, respectively.
• M* projects 14.0% annualized growth for the next five years in its analyst note.

I am forecasting below the range at 7.0% per year.

With regard to EPS growth:

• MarketWatch projects 4.7%/year contraction and 8.1%/year growth for ’23-’25 and ’23-’26 (based on 16 analysts).
• Nasdaq.com projects growth of 22.4% YOY and 28.5% per year for ’25 and ’24-’26 (6/6/2 analysts for ’24/’25/’26).
• Seeking Alpha projects 4-year annualized growth of 11.0%.
• YF projects YOY 24.5% contraction and 24.7% growth for ’24 and ’25 (13) along with 5-year growth of 3.4%/year.
• Zacks projects YOY 22.3% contraction and 23.0% growth for ’24 and ’25 (6) along with 5-year growth of 3.0%/year.
• Value Line projects 6.6% annualized growth from ’23-’28.
• CFRA projects 11.8% YOY contraction and 2.2% growth per year for ’24 and ’23-’25 along with a 3-year CAGR of -5.0%.
• M* projects long-term annualized growth of 10.7%.

My 3.0% forecast is at the bottom of the long-term-estimate range (mean of five: 6.9%). Initial value is 2024 Q1 EPS of $33.87 (annualized) rather than ’23 EPS of $36.29/share.

My Forecast High P/E is 8.0. Over the past decade, high P/E decreases from 18.9 (’14) to 9.1 (’23) with a last-5-year mean of 11.7 and a last-5-year-mean average P/E of 8.5. I am near bottom of the range [only ’22 (7.9) is less].

My Forecast Low P/E is 4.0. Over the past decade, low P/E falls from 10.4 (’14) to 5.5 (’23) with a last-5-year mean of 5.3. I am forecasting near bottom of the range [only ’20 (2.9) is less].

My Low Stock Price Forecast (LSPF) is $198.80. Default $135.50 given initial value from above is unreasonably low at 50.9% less than the previous close and 41.4% less than the 52-week low. Instead, I am selecting the 2023 low stock price: 27.9% less than the previous close and 14.1% less than the 52-week low.

Over the past decade, Payout Ratio (PR) ranges from 3.6% in ’22 to 12.3% in ’16. I am forecasting below the range at 3.0%.

These inputs land LAD in the HOLD zone with a U/D ratio of 0.5. Total Annualized Return (TAR) is 3.0%.

PAR (using Forecast Average—not High—P/E) of -2.6% is unacceptable for any size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead but even that is less than the current yield on T-bills.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 12 studies (my study and 6 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 13.0%, 10.6%, 10.6, 5.3, and 5.8%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 8.0 is about equal to MS and higher than mine (6.0).

MS high / low EPS are $56.31 / $33.87 versus my $39.26 / $33.87 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $50.00 is in the middle.

MS LSPF of $179.50 implies Forecast Low P/E of 5.3: equal to the MS average. MS LSPF is 9.7% less than mine resulting in more conservative zoning.

With regard to valuation, PEG is 3.2 and 2.6 per Zacks and my projected P/E, respectively: somewhat expensive. Relative Value [(current P/E) / 5-year-mean average P/E] is fair at 0.95.

MOS is robust because my inputs (including most-recent-quarter initial value) are near the bottom or below respective analyst/historical ranges and MS averages. Although the latter comparison is anecdotal due to tiny sample size, MS TAR of 19.5% is an eye-popping 16.5% per year greater than mine.

Lithia Motors has work to do before I would consider investment. Analysts discuss headwinds over the next year or two; I need to see a more convincing reason for growth than Zacks’ (YF’s) 3.0% (3.4%) long-term EPS estimate. More financial strength and higher liquidity would also be nice. A lower stock price would bring greater value.

Per U/D, LAD is a BUY under $227/share. BI TAR criterion is met ~$157 given a forecast high price ~$314.

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