Legacy Dealership Model Will Suffer Amid EV Trends Yet Recover

Key Takeaways

• Direct-to-consumer models and digital competition threaten Lithia's traditional dealership revenues and long-term profit stability.
  
• Industry shifts toward electrification and regulatory changes expose vulnerabilities in Lithia's legacy franchise model and earnings consistency.
  
• Secular risks to the dealership model, integration challenges from acquisitions, lagging organic growth, rising costs, and dependency on aftersales threaten profitability and revenue stability.

Catalysts

Operates as an automotive retailer in the United States, the United Kingdom, and Canada.

• While Lithia's investments in its omnichannel platform and proprietary digital solutions are boosting engagement and driving operational efficiencies, the accelerating shift towards direct-to-consumer sales models by automakers starkly threatens to bypass traditional dealerships altogether, which could severely limit future revenue growth and erode net margin expansion.
  
• Despite ongoing growth in personal vehicle ownership-particularly supported by demographic and regional trends in the Southeast and South Central U.S.-stricter regulatory pressures and urbanization trends could gradually dampen long-term demand, reducing both vehicle sales volume and service revenues across Lithia's network.
  
• While the expansion of high-margin adjacencies, such as Driveway Finance and aftersales, is enhancing profit consistency and contributing a larger share of net income, the industry-wide move toward online-only competitors and digital marketplaces points to mounting margin compression in core dealership operations and threatens gross profit levels over time.
  
• Even as Lithia's disciplined, accretive acquisition strategy has historically delivered above-target returns and geographic diversification, increasing industry consolidation means attractive targets will become scarcer and more expensive, pressuring future returns on invested capital and potentially slowing top-line growth from M&A.
  
• Although continued advancements in electrification and alternative drivetrains create new sales and service opportunities, the company's significant legacy exposure to internal combustion servicing and dependence on the traditional franchise model may leave it vulnerable as electrification accelerates and OEMs exert more control over distribution, creating risk for both recurring revenue streams and long-term earnings stability.

Lithia Motors Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Lithia Motors compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Lithia Motors's revenue will grow by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.4% today to 2.7% in 3 years time.
• The bearish analysts expect earnings to reach $1.1 billion (and earnings per share of $43.65) by about August 2028, up from $890.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 8.4x today. This future PE is lower than the current PE for the US Specialty Retail industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 4.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Lithia Motors Future Earnings Per Share Growth

Risks

• Exposure to EV mandates, direct-to-consumer trends, and new entrants such as Chinese OEMs in the U.K. pose secular risks to Lithia's traditional dealership model, which could erode future revenue growth and gross profit as automakers shift away from franchise dealers and the competitive environment intensifies due to digital retailing and alternative brands.
  
• Lithia's aggressive acquisition strategy, while a historical driver of rapid growth, brings execution and integration risks, overextension, and the possibility of higher debt loads, which may restrict cash flow, pressure net margins, and reduce earnings stability if market conditions or acquisition returns underperform projections.
  
• The normalization and persistent underperformance of same-store sales and gross profit metrics relative to key peers across several recent quarters signal a structural challenge in organic revenue growth and operational efficiency, potentially questioning the durability of Lithia's comparative advantage and its ability to consistently expand profitability.
  
• Increasing SG&A costs, particularly from personnel expenses and integration of higher-cost UK operations, remain a headwind for margin improvement, with management's long-term efficiency targets still several years away from realization, potentially impacting net margin expansion and overall earnings growth if cost reductions are not achieved as planned.
  
• Reliance on aftersales and finance operations for the majority of net profit implies heightened sensitivity to changes in consumer mobility preferences, regulatory impacts on ICE vehicles, and macroeconomic volatility in credit, all of which could negatively impact the stability and growth of core revenue streams and net income over the long term.

Valuation

• The assumed bearish price target for Lithia Motors is $310.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Lithia Motors's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $500.0, and the most bearish reporting a price target of just $310.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $38.9 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $291.97, the bearish analyst price target of $310.0 is 5.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.