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Was Lithia Motors Inc.'s First-Quarter Really That Bad?

By Daniel Miller - Apr 26, 2016 at 4:15PM

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After Friday's sell-off of Lithia Motors, you might be surprised to find its first quarter was pretty solid.

At a time when new-vehicle sales in the U.S. are hitting all-time highs, Lithia Motors (NYSE: LAD), which operates 138 dealerships in 15 states, posted a strong first quarter and topped analyst estimates on both the top and bottom lines. Further, the company managed to raise its outlook for used-vehicle sales growth this year, and for total revenue. Naturally, given the market's ability to get things right (eye-roll), it sold off Lithia, with shares tumbling more than 14% during midday trading on Friday -- it makes perfect sense (not).

Source: Lithia Motors Corporate Website.

With that said, lets dig into the first-quarter results and look at one reason investors shouldn't be so worried about Lithia Motors.

By the numbers
While Lithia did narrow its forecast for new-vehicle sales this year to an increase of 4.5%, down from 5.5%, it was apparently enough to send skittish investors already worried about slowing sales growth to the sidelines. Still, despite the lowered forecast, Lithia reported first-quarter profit of $1.55 per share, topping estimates by a penny, and revenue of $1.98 billion, which was also ahead of $1.95 billion estimates.

In terms of year-over-year comparisons, revenue, gross profit, and adjusted earnings per share checked in with double-digit growth.

Image source: Lithia Motors's first-quarter 2016 presentation.

Lithia's same-store sales also increased 8%, and its same-store gross profit jumped nearly 10% compared to the prior year's quarter. Oh, and to top it all off, Lithia's Board of Directors approved a 25% increase to the quarterly dividend, which will now pay out $0.25 per share.

What's the catch?
Despite the strong financial side of Lithia's first quarter, the company did admit on the conference call that about a third of the company's markets, mostly the energy states, are feeling some financial pressures and are seeing slightly declining sales. That, in combination with March new-vehicle sales in the U.S. slowing to the slowest pace in more than a year, was enough for investors to sell Lithia Motors -- but it's far from the only auto stock hurting in 2016.

On the bright side, though, Lithia is better equipped to handle a slowdown in new-vehicle sales than many realize. That's because while the company's Service, Body and Parts business segment only generated 10% of first-quarter total revenue, it generated almost one-third of the total gross profit mix -- a business many companies in the automotive industry lack. For comparison, Lithia's new-vehicle sales generated 55% of revenue, but only 22% of the first-quarter gross profit mix. Even further, the company's F&I (Finance and Insurance) segment generated only 5% of revenue in the first quarter but accounted for 25% of the gross profit mix.

Those two segments are important because Lithia could theoretically focus on generating more sales and profit with its service segment even if new-vehicle sales declined. Also, with F&I penetration rates of service contracts at 44% and lifetime oil contracts at 33%, there's plenty of growth for that segment without selling more vehicles.

Sure, a slowdown in new or used-vehicle sales will hurt Lithia, but a 14% plunge in share price seems a bit much for a company that beat top- and bottom-line estimates, increased its dividend, and generates more than half of its profit from segments other than new and used-vehicle sales.

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