Lithia Motors – LAD $135.38 MV $3.181BN EV $4.48BN
DESCRIPTION:
LAD is an auto retailer that started in ’46 as a single dealership and is now the 4th
largest in the country (on a sales basis). The team acquires underperforming
franchises and leverages their national network. We’ve followed auto retailers for
more than a decade and we’ve owned LAD for some time. We believe the stock is
very compelling with several potential catalysts.
VALUATION:
This is essentially a value story with an internet kicker (Carvana ticker: CVNA
kicker).
In addition to the traditional bricks and motor retail here, there is a digital play that
we feel is not completely priced into LAD’s shares.
We believe that JPM’s recent note forecasting a big “reveal” of what that might
look at is likely accurate. Here’s what JPM said, “We expect the company to lay
out a detailed plan over the coming weeks that is likely to show EPS potential of
$50+ on $40-50 bn revenue and higher than current corp average margins
(SG&A/GP <60%).”
In essence, we believe the company is focused on growing their sales by 2.5x and
they will integrate their digital model. By definition, their SG&A as a % of GP
drops rate drops significantly. If you think about a traditional auto retailer, the
internet model really helps them have less people on the floor and the leads go
directly to an assigned person. In addition, LAD buys cheaper than Carvana. LAD
finances cheaper than Carvana. Given CVNA’s $18bn market cap, one might see
why LAD could be intriguing here if they do this right.
If you look out a few years, we can see an industry rolled up, increased margins,
and a potential spin of the digital business.
An upside scenario might be say $35bn of revenue over the next 5+ years. Assume
a 4% operating margin and you can create in your mind some compelling earnings
power.
In addition to what the company is likely focused on, LAD also owns 33% of an internet business called SHIFT. Recent IPO VRM has a $5bn market cap and we discussed CVNA’s market cap of $18bn. SHIFT is a peer, albeit earlier stage. So, we don’t know the real value of shift but we estimate it could be worth $700mm and possibly more, implying 20%+ of the LAD market cap. Again, we don’t believe there is much SHIFT hype embedded into shares but VRM and CVNA are its peers.
