Investors in Lithia Motors Inc (LAD) understand the value of the cars and services that Lithia provides. Whether the buyer wants to buy a Porsche or a Honda, Lithia has 139 dealerships in 14 states to serve customers. Coming into the July 28 second-quarter report, Lithia shareholders saw even more evidence that the business can continue to beat impressive results and once again Lithia delivered. Let's dive into what Lithia said and what is in store for the business in years to come.
Lithia Delivers Quality
Lithia's second-quarter results should once again impress shareholders. Revenue jumped 6.5% to $2.13 billion, which missed estimates by $30 million. Net income also leaped by 15% to $15 million, which produced earnings of $1.96 per share. The market was expecting $1.93 per share. Lithia showed even more signs of consistent slow and steady growth.
Diving deeper into Lithia's performance, the company has its focus on achieving a "new milestone of $9 in earnings per share." Sales were pretty much flat with new vehicle sales increasing 2%, but domestic sales sank 2% and luxury sales dropped 4%. Buy backs are also are having an impact, bringing management to raise third quarter estimates of $2.11 to $2.15 a share.
Lithia's main focus is on total gross profit rather than its gross margin. Annual revenues are also increasing due to acquisitions, free cash flow and unfinanced operating real estate. For the luxury segment, gross profit per car increased, even though the number of vehicles sold decreased. The main strategy for management is to continue purchasing and acquiring stores in rural markets where real estate is cheap. But, the focus is still on accomplishing organic growth as well as growth achieved by acquisitions. Lithia is seeing weakness in new vehicle sales and profits in markets such as Texas. Lithia also achieved gross margin growth, growing margins from 14.9% last year to 15.1% this year.
CEO Bryan DeBoer is pleased with a future of predictable and profitable new vehicle sales. "However, we believe the most likely scenario is a sustained new vehicle sales environment of around 17 million units in the coming years," DeBoer said. "This provides Lithia with several benefits, including a predictable and profitable cadence of new vehicle sales, complemented by incrementally higher service revenues as the vehicles sold over the past seven years age and require maintenance." However, DeBoer also pointed out that gross profit per new vehicle has increased $39, at $2,015 compared to $1,976 in the second quarter of 2015.
An Accelerated Future for Lithia?
Overall, Lithia seems to see plenty of potential in its people. As DeBoer said, "We believe continuing to foster a culture that inspires leaders to be entrepreneurial, unlocks their potential to find new and innovative ways to grow profitably at each of our locations. This culture is built upon best-in-class performance metrics that allow leadership to manage trends and leverage our existing management team for a stable and cost-effective growth." The CEO brought up the fact that the business was almost 70% domestic before the recession and that they are currently 20% each in Toyota (TM, Financial), Honda (HMC, Financial) and Chrysler.
The big question for Lithia is whether it will be able to sustain the seasonally adjusted annual rate that they have seen in the past. Management sees a sustained SAAR around $17 million. Nevertheless, Lithia should continue to see a growth in gross profit per car sold.
Disclosure: No position in the stock mentioned.
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