Driveway Finance And Network Expansion Will Drive Future Success

Key Takeaways

• Integration of digital and physical channels and strategic investments could boost revenue, margins, and long-term growth.
  
• Cost savings and expansion efforts aim to increase U.S. market share and enhance earnings per share through acquisitions and share buybacks.
  
• Tariff uncertainties, fluctuating used vehicle sales, competitive financing pressures, and high acquisition costs may challenge growth, margin, and profitability targets.

Catalysts

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

• Lithia Motors has integrated digital and physical channels, potentially boosting revenue by increasing customer engagement and loyalty, thereby enhancing long-term revenue growth.
  
• Strategic investments in adjacencies like Driveway Finance are contributing to earnings growth and could improve net margins as these become significantly profitable.
  
• The company’s disciplined cost management has led to $200 million in annual cost savings, with plans for further SG&A reductions, positively impacting net margins.
  
• The expansion of their physical network and strategic partnerships aim to increase market share towards a 5% U.S. market penetration, which should drive future revenue growth.
  
• Lithia’s capital allocation strategy balances acquisitions and share buybacks, potentially enhancing earnings per share by leveraging current share buyback opportunities.

Lithia Motors Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lithia Motors's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 2.5% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $44.86) by about March 2028, up from $802.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 9.8x today. This future PE is lower than the current PE for the US Specialty Retail industry at 13.5x.
• Analysts expect the number of shares outstanding to decline by 4.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Lithia Motors Future Earnings Per Share Growth

Risks

• Tariff uncertainties and potential impacts on 36%-38% of vehicles could result in inventory challenges and increased costs, potentially affecting revenue and margins.
  
• Fluctuations in used vehicle sales and market conditions could impact GPU performance, with risk to revenue if anticipated improvements do not materialize.
  
• High acquisition pricing in the automotive retail market may deter future strategic expansions and impact revenue growth and profitability.
  
• SG&A cost discipline may face challenges if top-line growth does not achieve projected levels, affecting net margins.
  
• Competitive pressures in financing operations and changes in consumer credit behavior risk altering the anticipated profitability trajectory of their Financing Operations segment, impacting earnings.

Valuation

• The analysts have a consensus price target of $431.375 for Lithia Motors based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $330.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $46.3 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 11.4%.
• Given the current share price of $298.19, the analyst price target of $431.38 is 30.9% 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.