There's a monster growth stock making waves in the auto industry, and it's not Carvana or Tesla. In fact, unlike those more discussed growth stocks, this stock is also a strong value play, trading at an incredibly cheap multiple. The stock is under-the-radar Lithia Motors (LAD -0.48%), and it's time that it enters the radar of more investors.
Earnings growth in the fast lane
Lithia Motors is an Oregon-based chain of auto dealerships, growing at a rapid rate through acquisitions. While some companies can lack discipline when pursuing growth through acquisitions, Lithia Motors has a long and successful track record of making accretive purchases -- boasting an average return on investment of over 25%.
The company has a footprint of 280 such dealerships across North America, with 95% of consumers in the U.S. living within a 250 mile radius of a Lithia dealership. The company has a strong commitment to meeting customers where they are, whether at a physical location or online, where Lithia has an extensive presence including multiple platforms like Driveway and GreenCars.
Across these platforms, Lithia has the largest inventory of cars for sale online in the United States. Driveway allows customers to shop for and finance their vehicle purchase all in one place, and will deliver a customer's new car right to their door. GreenCars is powered by Driveway.com and focuses on electric vehicles. It differentiates itself by offering customers extensive resources for learning about electric vehicles and access to a nationwide network of 222 charging locations.
While this is a seldom-discussed stock, there's nothing quiet about the returns it has generated for its shareholders. Over the past decade, the company has grown earnings per share at an incredible 32% compound annual rate while shareholders have enjoyed a 500% return on their investment over the same time frame.
With a long track record of earnings growth like this, you would expect Lithia to trade at a sky-high multiple, but that's not the case here.
A luxury buy at a clunker price
Despite Lithias' impressive long-term earnings growth, shares of the company are dirt cheap. In fact, I first came across it as a value stock when I discovered it was a top-10 holding of Bill Nygren's Oakmark Select Fund. Nygren is a respected value investor that I have followed for a long time.
What I like about Nygren is that he is a value manager with an open-minded approach that enables him to make growth stocks like Alphabet his top holding when the price is right. As of the most recent public filing, Lithia is Nygren's seventh-largest holding, and he added 12% to his position during the quarter.
The shares trade at just five times earnings, which is far cheaper than the broader market as well as for peers like CarMax, which trades at just over 12 times earnings. The valuation is cheap because investors are worried that a recession will curtail consumer demand for cars. However, investing is a long-term game, and buying the stock now while it is inexpensive should pay off when these fears dissipate.
Lithia Motors has also been repurchasing shares, buying back over $550 million worth during the most recent quarter. Share buybacks add to shareholder value because they reduce the number of shares outstanding and thus help to increase earnings per share in the future. Furthermore, they can also be a signal that management views its stock as undervalued.
Full speed ahead to 2025
Lithia could just be getting started as a growth stock. Its management team has outlined a plan to grow revenue to $50 billion and earnings per share to $55 to $60 by 2025. The company has an exemplary track record of growing the company, so it could well hit these targets. If Lithia can earn $60 a share, with a current price-to-earnings multiple of five, the stock should be worth $300, implying upside of almost 50% from today's prices.
But this doesn't even account for the possibility of a higher price-to-earnings (P/E) multiple if and when market conditions improve and as more investors come to appreciate Lithia's growth prospects. If the stock were to hit $60 in earnings per share and achieve a P/E multiple of 10, the stock price could theoretically rise to $600 a share. Obviously, 2025 is a long way off and a lot can happen between now and then, but this illustrates the possibilities if the company continues to execute on its strategy.
With an attractive valuation multiple, a venerable track record, and an ambitious but realistic growth strategy for the next three years, Lithia Motors is the type of monster growth stock at a value price that I want in my portfolio. As Warren Buffett has said, it is wise to be "fearful when others are greedy, and greedy when others are fearful." I recently initiated a starter position in the stock and plan on making it a core piece of my portfolio over time.