Abrams Capital Management leader David Abrams (Trades, Portfolio) disclosed that he established an 8.02% stake in Lithia Motors Inc. (LAD, Financial) on July 27.
A former protégé of Seth Klarman (Trades, Portfolio), the Boston-based investor follows a fundamental, value-oriented approach to picking stocks, selecting a concentrated number of positions. The investment firm looks for long-term opportunities across a wide array of asset types in both foreign and domestic markets.
According to GuruFocus real-time picks, Abrams invested in 2 million shares of Lithia Motors for an average price of $85.01 per share, dedicating 5.06% of the equity portfolio to the stake.
The Oregon-based automotive retailer, which is one of the nation’s largest, has a market cap of $2.14 billion; its shares were trading around $85.93 on Monday, up 4.58%, with a price-earnings ratio of 8.49, a price-book ratio of 1.85 and a price-sales ratio of 0.18.
The Peter Lynch chart below shows the stock is trading below the earnings line, suggesting it is undervalued.
On July 25, the company reported record second-quarter results. Revenue increased 26% to $3.1 billion and adjusted earnings grew 11% to $2.52 per share. Despite the improvement, earnings fell short of analyst estimates of $2.94, sending shares lower.
Lithia’s financial strength was rated 4 out of 10 by GuruFocus. Over the past three years, the company has issued approximately $1.4 billion in new long-term debt, which, according to the Altman Z-Score of 2.85, has put in under some financial pressure.
The company’s profitability and growth was rated 7 out of 10. While the operating margin has declined over the past several years, the moderate Piotroski F-Score of 6 indicates business conditions are stable. In addition, Lithia has a business predictability ranking of one out of five stars. GuruFocus says companies with this rank typically see an average gain of 1.1% per year and have good earnings and revenue growth.
With his purchase, Abrams became Lithia’s largest guru shareholder. Steven Cohen (Trades, Portfolio), Hotchkis & Wiley and David Dreman (Trades, Portfolio) also have positions in the stock.
Abrams’ $3.2 billion equity portfolio, which is composed of 20 stocks, is largely invested in the financial services sector. Other auto retailers he has positions in are Group 1 Automotive Inc. (GPI, Financial) and Asbury Automotive Group Inc. (ABG, Financial).
Disclosure: No positions.
