Lithia Motors: Zacks’ Bull of the Day Play

Lithia Motors (LADAnalyst Report) has been riding in fifth gear all year, with an impressive 35% share rally from the mid-$80s to over $115.

The move for this operator of 129 auto dealerships in 14 states, primarily in the Northwest and Southwest, has been driven by solid earnings momentum, even after a slight hiccup last fall. More on this in a moment.

Lithia’s earnings momentum has been reflected in its Zacks Rank all year too, with the stock consistently earning either a #1 Rank (Strong Buy) or #2 Rank (Buy) since December 31.

And after their earnings beat and guidance last week, analysts have been scrambling to raise estimates further, taking full-year 2015 EPS up to $6.72 from $6.41 and 2016 projections from $7.11 to $7.39.

What Earnings Hiccup?

Here’s what I wrote about LAD on October 23…

Lithia Motors was a shining star of the automotive dealer group industry for the past three years. And just when car sales were breaking recovery records left and right this year, the stock — and more importantly, its earnings momentum — reached a peak.

One wonders if all the terrific sales numbers were also juiced in large part by ultra-cheap financing and special incentives.

On Monday October 13, Lithia warned that it is expecting its 2014 third quarter adjusted net income to be in the range of $34 million to $34.8 million, or $1.30 to $1.32 per diluted share, below its previous forecast of $1.36 to $1.38 per share.

This, of course, brought a wave of analyst earnings estimate revisions (EER). They took this year’s consensus down from $5.05 to $4.86 and next year got clipped even more on a percentage basis from $6.40 to $5.90.

But if the US consumer and Lithia both continue to be as strong as they were in the past few years in an expanding economy, then look for LAD to find a bottom sometime in the next few months.

It looks like those hiccups quickly disappeared, as LAD found bottom with the rest of US equities in October and has only marched higher.

Here’s the awesome Zacks visual on earnings momentum which explains why…

Since that third quarter warning, Lithia has posted 3 earnings beats in the last 3 quarters averaging +15%.

Driving the earnings growth is strong top-line growth. Second quarter 2015 revenue from continuing operations increased $775 million, or 63%, to $2.0 billion from $1.2 billion for the second quarter of 2014.

And here were the sales highlights of a strong Q2…

Second Quarter-over-Quarter Operating Highlights:

Total same store sales increased 11%

New vehicle same store sales increased 8% Used vehicle retail same store sales increased 16% Service, body and parts same store sales increased 10%

Lithia remains a strong growth franchise in auto sales. As long as the economy and consumer are firing on enough cylinders, LAD should continue its winning ways.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.


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