Richard J. Parsons
Summary
- I began accumulating Lithia Motors in 4Q 2021 after seeing the auto dealer screen well against my target criteria.
- Criteria: A+ S&P Quality Ranking, Buy/Strong Buy from three favorite analysts, 50% fair value upside, P/E <10., 20% Risk-Adjusted ROE.
- On Feb. 9 Lithia posted earnings and revenue exceeding analyst expectations and confirmed aggressive share repurchase.
- I will add to my current position in Q1 at <$320 which appears to provide an okay margin of safety.
- Lithia and other auto dealers, however, are not without risk.
Background
My area of expertise is banking, an industry in which I have more than four decades of experience.
When I invest outside of banking, I lean heavily on the opinions of informed third parties. My information is derived not only from the opinions expressed at Seeking Alpha, but also BofA Global Research, S&P Equity Quality Rankings, and Morningstar.
Periodically I use screens to identify non-banks for potential investment. My criteria emphasize Quality, Profitability, and 12-month Price Targets.
Key Lithia Numbers
Per Ycharts, at market close Feb. 8 (and pre-Feb. 9 earnings announcement):
- Feb. 8 closing price: $298.76
- 12-mo. price change: -20.7%
- 12-mo. price range: $274-$417
- Market Cap: $9.046 billion.
- P/E: 8.9x
- Forward P/E: 7.8x
- Price/Sales: 0.41
- Share count Sept. 30, 2021: 30.28 million
- Dividend yield: 0.47%
- ROE: 30%
- Beta: 1.63
- Debt/Equity: 0.83
Lithia Motors: Screens as Strong Buy
In 4Q 2021, Lithia Motors, Inc. (NYSE:LAD) jumped off my screen as a particularly attractive opportunity.
- Lithia's "A+" Quality Ranking makes this national auto dealer based in Oregon just one of 18 companies earning the highest quality ranking from S&P.
- Prior to Lithia's earnings announcement pre-market Feb. 9, my three primary research sources showed an average 12-month Price Target of $450, a 50%+ theoretical opportunity above Lithia's Feb. 8 close.
- Per Ycharts, of the thirteen analysts who follow Lithia, as of Feb. 8, the range of 12-month targets was $303-$542, with eight Buys, three Outperform, one Hold, and one Sell, which results in a Composite Buy rating of 1.69.
Based on those three criteria, I began accumulating Lithia shares in November 2021. The range of my investments is $288-$326 with an average cost of $300.
Lithia Earnings Announcement Feb. 9
Lithia announced earnings pre-market Feb. 9. Here are highlights:
- Adjusted fourth quarter 2021 net income/diluted share $11.39, a 109% increase compared to $5.46 per diluted share in the same period of 2020. Analyst estimates for the quarter: $10.11.
- Revenue growth 4Q/4Q = 60%, with new auto sales +38% and used +82%. Service, body, and parts +58%. F&I +23%.
- Balance sheet liquidity: Lithia reports $1.5 billion in cash and available lines of credit.
- Repurchases of 911,000 shares from Q4 through Feb. 8, amounting to 2.5% of diluted share count at an average price of just under $284. Lithia reports having capacity to acquire $679 million in further repurchases.
My Plans
My plans are to accelerate share accumulation given the $450 price target (pre-earnings), rare A+ Quality Ranking, and the blow-out quarter announced pre-market Feb. 9. I am very bullish <$320 as a holding in my long-term buy-and-hold accounts.
Concerns/Risks
Chief concerns/risks that could temper enthusiasm:
- Spike in fuel prices that pushes US economy into recession.
- Out-sized insider sales.
- A material decline in analyst price targets.
Lithia's price volatility is a concern.
While Lithia meets my risk/return profile as an investor, investors interested in Lithia should do their homework before investing. The auto dealer's very high beta (1.63) and 12-month price range ($274.03-$417.68) indicate significant volatility.
While my current plan is to be a long-term Lithia shareholder, should Lithia's stock price spike (e.g., >$375) in the next ninety days, I may take profits given the auto dealer's recent history for price volatility.
Richard J. Parsons
Richard J. Parsons is a former banker who writes about the banking industry as well as market risk. He is currently working on his third book about banks. His first book, "Broke: America's Banking System" (2013, RMA), describes why the industry is prone to catastrophic cycles that produced 3,000 bank failures in the U.S. between 1985 and 2012. The second book, "Investing in Banks" (2016, RMA) examines why a small group of elite banks of all sizes consistently overperform the industry over time and through the ups and downs of business cycles. The new book will update "Investing in Banks" with data from 2016-2021. Parsons is a frequent contributor to The Risk Management Journal. He teaches the Advanced Operational Risk Management course for the RMA. Prior to writing and speaking about the banking industry, Parsons spent more than 31 years at Bank of America where he was an executive vice president and member of the Management Operating Committee. In his last role he chaired the bank’s Operational and Compliance Risk Committee and the Emerging Risk Committee. Parsons has a BA in history from Ohio Wesleyan University and an MBA from the University of Virginia Darden School of Business.
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
