Why Lithia Motors Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Lithia Motors (NYSE: LAD  ) were selling off today, falling as much as 12% after posting disappointing guidance in its third-quarter report.

So what: On its face, the car dealership chain had an impressive quarter, as it saw adjusted net income grow 27% to $29.6 million, its most profitable quarter ever. Revenue, meanwhile, grew 22% to $1.07 billion. Both revenue and profits beat earnings estimates. CEO Bryan DeBoer noted that Lithia had "another solid quarter of sales growth that outpaced the national rate of recovery." What seemed to throw off the market, however, was Lithia's fiscal 2014 EPS guidance of $4.15-$4.25, below analyst estimates of $4.45.  

Now what: The pullback in Lithia shares today could also be related to the stock's rise over the course of the year, as shares had doubled before today's drop. Lithia's earnings beat was also was smaller than it's posted in the past four quarters. Still, I'd expect management to be providing conservative guidance for the next year, as continuing bullish activity in the auto industry should lift next year's earnings by more than 7%. Given that, I'd expect to see more earnings beats in Lithia's future.

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