Lithia Motors Could Shift Into Gear Soon

Although the major indices have pulled back a bit in recent weeks, many companies' stocks are still close to their all-time high levels. It is at times like these that I find it beneficial to study particular companies that have not fared as well since they may be ripe for a turnaround.

One company that stands out to me is Lithia Motors (NYSE: LAD  ) , an automotive franchisee and retailer of new and used vehicles as well as replacement parts in the United States. Shares of the company are down approximately 20% in 2014 alone. With earnings set to be released next month, the time seems right to consider Lithia Motors for long-term growth.

Reliable business
Perhaps the most intriguing aspect of Lithia Motors' business is that it is relatively utilitarian in nature compared to the businesses of the major vehicle manufacturers like Ford and General Motors. The company's business of selling new and used cars and parts relies heavily on the consumer's willingness to save money on large automobile purchases.

Additionally, Lithia Motors carries significantly less headline risk compared to the major car manufacturers, as the company does not have to contend with problems like debilitating manufacturing issues. As such, major automotive retailers like Lithia Motors remain an interesting way for investors to capitalize on strong domestic cars sales without many of the typical industry risks.

The proof is in Lithia Motors' strong revenue growth over the last five years. The company has grown revenue in seven years out of the last nine. Only in the challenging 2008-2009 time period did Lithia Motors fail to increase revenue on a year-over-year basis. 

Growth compared to peers
The following is a breakdown of Lithia Motors' projected growth in 2014 compared to that of industry competitors AutoNation (NYSE: AN  ) and Penske Automotive Group (NYSE: PAG  ) . 

Company

AutoNation

Lithia Motors

Penske Automotive

Revenue Growth 2014

6.2%

11.5%

8.9%

EPS Growth 2014

13.6%

12.8%

16.5%

Lithia Motors' strong track record of revenue growth is expected to continue into 2014, as the company is projected to lead all listed competitors in sales growth going forward by a significant margin. However, the company's projected earnings growth of 12.8% in 2014, although impressive, lags behind the EPS growth rates of both AutoNation and Penske Automotive.

What Lithia Motors may lack in EPS growth compared to competitors, the company now makes up for in valuation. Lithia Motors is the cheapest company on a trailing twelve month and future twelve month basis. The company's current P/E of 15.07 and future P/E of 12.81 are cheaper than AutoNation's respective P/E ratios of 16.56 and 14.02 and Penske Automotive's 16.27 and 13.24. 

Why the drop?
Since we now know that Lithia Motors is still projected to grow at very solid rates in 2014 and currently trades at cheap valuation levels compared to peers, let's focus on why the company has struggled recently.

The good news is that Lithia Motors' struggles are not so much company-specific. Most of the major automotive retailers have not performed well as of late. AutoNation is down approximately 5% year-to-date, while Penske Automotive is down approximately 11% year-to-date.

A major reason is that auto sales in general slowed in December despite having grown significantly in 2013 overall. U.S. auto sales grew roughly 8% in 2013 but slowed drastically in December. Due to cold weather, domestic auto sales in December remained flat on a year-over-year basis. 

Although global automotive sales are expected to be robust in 2014, domestic sales are projected to grow only 5% this year, which is down notably from 8% in 2013. This lower growth forecast has no doubt affected the growth projections of all of the domestic automotive retailers.  

Opportunity
With shares of Lithia Motors off significantly from the company's all-time highs and down roughly 20% in 2014 alone, much of the bad news surrounding weaker-than-anticipated auto sales could already be baked in.

The fact remains that the company is still expected to grow at healthy levels this year, and domestic car sales are still on track to grow by over 5%. Since Lithia Motors is one of the stronger companies in the segment and is currently trading at the cheapest multiples, it remains an ideal turnaround candidate in the automotive space.

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