Lithia Motors Inc Valuation – August 2018 $LAD
Company Profile (excerpt from Reuters): Lithia Motors, Inc. incorporated on December 23, 1968, is an operator of automotive franchises and a retailer of new and used vehicles and related services. As of February 28, 2017, it offered 30 brands of new vehicles and all brands of used vehicles in 154 stores in the United States and online at Lithia.com, DCHauto.com and CarboneCars.com. It operates through three segments: Domestic, Import and Luxury. Its Domestic segment consists of retail automotive franchises that sell new vehicles manufactured by Chrysler, General Motors and Ford. Its Import segment consists of retail automotive franchises that sell new vehicles manufactured primarily by Honda, Toyota, Subaru, Nissan and Volkswagen. Its Luxury segment consists of retail automotive franchises that sell new vehicles manufactured primarily by BMW, Mercedes-Benz and Lexus. The franchises in each segment also sell used vehicles, parts and automotive services, and automotive finance and insurance products. It sells new and used cars and replacement parts; provides vehicle maintenance, warranty, paint and repair services; arranges related financing, and sells vehicle service contracts, vehicle protection products and credit insurance. Its dealerships are located across the United States. It seeks domestic, import and luxury franchises in cities ranging from mid-sized regional markets to metropolitan markets.
Downloadable PDF version of this valuation:
ModernGraham Valuation of LAD – August 2018
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass 6 out of the following 7 tests. | ||||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | $2,076,632,934 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.20 | Fail | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Pass | ||
| 4. Dividend Record | Dividend Payments for 10 years prior | Fail | ||
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | 748.73% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 10.12 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 1.84 | Pass | |
| Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor. | ||||
| 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | 1.20 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 2.69 | Fail | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Pass | ||
| 4. Dividend Record | Currently Pays Dividend | Pass | ||
| 5. Earnings Growth | EPSmg greater than 5 years ago | Pass | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $8.48 |
| MG Growth Estimate | 15.00% |
| MG Value | $326.33 |
| Opinion | Undervalued |
| MG Grade | C+ |
| MG Value based on 3% Growth | $122.90 |
| MG Value based on 0% Growth | $72.05 |
| Market Implied Growth Rate | 0.81% |
| Current Price | $85.79 |
| % of Intrinsic Value | 26.29% |
Lithia Motors Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $3.78 in 2014 to an estimated $8.48 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.81% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Lithia Motors Inc revealed the company was trading below its Graham Number of $94.66. The company pays a dividend of $1.06 per share, for a yield of 1.2% Its PEmg (price over earnings per share – ModernGraham) was 10.12, which was below the industry average of 18.51, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-44.61.
Lithia Motors Inc receives an average overall rating in the ModernGraham grading system, scoring a C+.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$44.61 |
| Graham Number | $94.66 |
| PEmg | 10.12 |
| Current Ratio | 1.20 |
| PB Ratio | 1.84 |
| Current Dividend | $1.06 |
| Dividend Yield | 1.24% |
| Number of Consecutive Years of Dividend Growth | 4 |
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| ModernGraham tagged articles | Morningstar |
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| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 6/1/2018 |
| Total Current Assets | $2,893,329,000 |
| Total Current Liabilities | $2,412,211,000 |
| Long-Term Debt | $1,295,077,000 |
| Total Assets | $5,164,162,000 |
| Intangible Assets | $478,065,000 |
| Total Liabilities | $4,003,294,000 |
| Shares Outstanding (Diluted Average) | 24,882,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $9.18 |
| Dec2017 | $9.75 |
| Dec2016 | $7.72 |
| Dec2015 | $6.91 |
| Dec2014 | $5.26 |
| Dec2013 | $4.05 |
| Dec2012 | $3.07 |
| Dec2011 | $2.21 |
| Dec2010 | $0.52 |
| Dec2009 | $0.41 |
| Dec2008 | -$12.51 |
| Dec2007 | $1.06 |
| Dec2006 | $1.77 |
| Dec2005 | $2.54 |
| Dec2004 | $2.27 |
| Dec2003 | $1.93 |
| Dec2002 | $1.80 |
| Dec2001 | $1.60 |
| Dec2000 | $1.76 |
| Dec1999 | $1.60 |
| Dec1998 | $1.14 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $8.48 |
| Dec2017 | $7.66 |
| Dec2016 | $6.21 |
| Dec2015 | $5.07 |
| Dec2014 | $3.78 |
| Dec2013 | $2.71 |
| Dec2012 | $0.94 |
| Dec2011 | -$0.64 |
| Dec2010 | -$1.96 |
| Dec2009 | -$2.58 |
| Dec2008 | -$3.04 |
| Dec2007 | $1.76 |
| Dec2006 | $2.10 |
| Dec2005 | $2.18 |
| Dec2004 | $1.96 |
| Dec2003 | $1.78 |
| Dec2002 | $1.67 |
Recommended Reading:
Other ModernGraham posts about the company
Lithia Motors Inc Valuation – Initial Coverage $LAD
Other ModernGraham posts about related companies
Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.
