Lithia Motors (NYSE:LAD) announced the results for last quarter on April 24 and investors were mostly disappointed with the results considering that the stock is down close to -7% since the announcement. This is my follow up coverage on this company after my February article titled Lithia Motors: Strong Growth At A Cheap Price. For the quarter, the company announced $6.11 per share in net income while analysts were looking for $7.88 and $8.6 billion in revenues when analysts were looking for $8.56 billion, so it was a significant miss for net income and a slight beat for revenues.
Year-Over-Year Results
The interesting thing was that the company posted a -29% decline in net income even with revenues rising 23% year-over-year, indicating rising costs. In the last quarter gross expenses were up 25%, SG&A expenses were up 22%, and interest expenses were up anywhere from 63% to 110%, depending on whether we are talking about floor plan interest or other interest.
Same Store Comparisons
When it came to same-store sales which refer to stores that have been owned by the company for at least a year (which excludes acquisitions or new store openings), sales volume was up 2% for new cars but down -5% for used cars. For new cars, average sale price was down -1% while for used cars average price dropped by -3%. Perhaps the reason new car sales fared better than used cars is the fact that the gap between new car and used car prices have been fairly small lately and many consumers would rather buy a new car than a used one considering the small price difference.
Also, you would think that a slight increase in volume and slight drop in sale price would come to a wash but in reality the company's gross profit per new car came at $5,771 which was a significant drop of $1,640 or 22% from the same quarter a year ago. This indicates that costs were rising while average sale price was dropping, creating margin compression. For used cars, gross profit per unit only dropped by about $153 even though both sales volume (-5%) and sales price were down (-3%). This means that the company's cost structure for new cars is rising much faster than its cost structure is rising for used cars. It kind of makes sense though. If the overall market for used cars is declining, the company will not only get less money for the used cars it sells but also it will pay less when acquiring used cars from other parties since a decline in prices works both ways.
Inventories
The company's inventories are down slightly from last quarter but still up significantly from last year. Currently the company's new vehicle inventory stays at 60 days (indicating it would take 60 days to sell the current inventory at the current rate of sales) which is down from 65 days of last quarter but still significantly up from last year's 51 days. For used cars, inventory declined from 64 days to 58 days in the last quarter but still up from 53 days a year ago. Total value of the company's total inventories also were up from $4.75 billion to $5.86 billion but this also was driven by new store openings and acquisitions so it may not be an apples to apples comparison. Car prices haven't changed much from last year as we mentioned above but interest rates were up slightly which might have contributed to some of the inventory buildup. It's also possible that consumers are finally slowing down their big ticket purchases in light of a slowing economy.
Cash Allocations
The company announced that there is $452 million remaining in its repurchase authorization budget which is enough to repurchase 6% of existing shares. Moving forward, the company doesn't appear to be very aggressive about returning money to shareholders besides this repurchase plan and a small dividend with a yield of less than 1%. In fact, the company reiterated its long-term plan that it will spend close to 60% of its cash flow on acquisitions or opening new stores while returning about 20%-25% of its cash flow to investors which means it will be investing aggressively toward future growth. The company's management seems to be convinced that despite short-term troubles, the company's long-term prospects are bright.
Currently many people expect the Fed to cut rates anywhere from 2 to 4 times in the next 12 months and possibly as much as 6-7 times in the next two years. This could result in higher demand for both new and used cars but there's likely to be pressure in the short term which is exactly what the Fed wants in order to contain inflation because lower demand means smaller price increases if any at all. Meanwhile Lithia needs to be able to control its costs so that it doesn't have to raise prices when demand is already softening a bit as it is. The company can't afford to cut prices but it doesn't want to raise prices either. It wants to make current price structure work by cutting its non-fixed costs and maybe negotiate better terms with car companies that provide it with new vehicles.
Conclusion
Since my initial coverage of the stock, it's down about -15% and roughly half of this drop came on the day of Q1 earnings announcement. I believe the company's long-term growth story is still intact and investors shouldn't abandon the stock at the moment. If anything, this may be a good time to start a new position or consider averaging down. Analysts haven't yet updated their estimates for the company in light of its most recent earnings announcement but I expect them to lower this year's estimates by about 15% and next year's estimates by about 5%-10%. Anything beyond 2026 should remain the same. If true, the company is still looking for a forward P/E of 8 for this year, a forward P/E of 7 for next year and 5-6 for years beyond 2026 which indicates a cheap valuation.
When it comes to this company it's all about the long-term story. Short-term troubles should not be a big deal as long as the long-term growth story is intact and the company is able to execute on its long-term plan. So far we've seen some signs of short-term troubles mostly caused by external factors such as lower car demand overall driven by higher interest rates but we've seen no sign that the company is failing in its long-term execution plan.
Diesel
I own separate portfolios for separate goals. I have one portfolio where I have nothing but income plays, another portfolio where I have nothing but growth stocks. I also have another portfolio where I run my options plays. I try not to mix different portfolios because they all have different goals and purposes. Sometimes one of my portfolios outperform other times other do. I am a big believer of diversification of not only assets but also methods and investment philosophies. Diversification is not simply buying 20 different stocks, it is applying different methods to different goals that fit to serve an investor's short term and long term targets.I am a "long only" investor and stay away from shorting companies. I will also do a lot of delta-neutral options plays where I will try to benefit from a stock or funds lack of movement. Also a huge fan of options plays and strategies including but not limited to covered calls, iron condors, butterflies, calendar spreads, call-put spreads. I've probably tried every options play there is, sometimes with success, sometimes with failure.At Seeking Alpha, I mostly analyze and write about stocks and funds that I own or I plan on owning. I rarely ever write about a stock or fund I at least don't have intention of owning some day.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of LAD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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