Is Lithia Motors a Bargain After Recent Share Price Dip and DCF Outlook?

• If you have been wondering whether Lithia Motors at around $339 a share is a genuine value opportunity or just another cyclical auto play, you are in the right place.
• The stock has dipped about 1.4% over the last week, but it is still up roughly 15.5% over the past month, even though it remains slightly negative year to date and over the last year. This hints that sentiment might be turning after a softer stretch.
• Recently, investors have been digesting updates on Lithia’s ongoing dealership acquisition strategy and network expansion. These signal that management is still leaning into growth despite a choppy auto demand backdrop. At the same time, headlines around used car pricing, interest rate expectations, and consumer credit trends have added nuance to how the market is pricing auto retailers and their long term earnings power.
• Against that backdrop, Lithia screens as attractively priced on our framework, scoring a 5/6 valuation check, which suggests it looks undervalued on most of the classic metrics we track. Next, we will break down those valuation approaches in detail, and then circle back to a more holistic way of thinking about what the stock is really worth.

Find out why Lithia Motors's -5.0% return over the last year is lagging behind its peers.

Approach 1: Lithia Motors Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model estimates what a business is worth by projecting its future cash flows and discounting them back to today, to reflect the time value and risk of those dollars.

For Lithia Motors, the latest twelve month Free Cash Flow is slightly negative at around $47 million, which reflects near term investment and working capital swings rather than mature, steady state economics. Looking ahead, analysts and extrapolated estimates point to a sharp improvement, with Free Cash Flow expected to reach about $1.56 billion by 2029 and continue to grow toward roughly $2.67 billion by 2035. These projections come from a 2 Stage Free Cash Flow to Equity model, in which early years use analyst forecasts and later years are extrapolated by Simply Wall St.

When all those future cash flows are discounted back, the model suggests an intrinsic value of about $739.66 per share, implying the stock is trading at roughly a 54.1% discount to its estimated worth. On this framework, Lithia screens as meaningfully undervalued.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Lithia Motors is undervalued by 54.1%. Track this in your watchlist or portfolio, or discover 918 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Lithia Motors.

Approach 2: Lithia Motors Price vs Earnings

For a consistently profitable business like Lithia Motors, the Price to Earnings ratio is a useful yardstick because it links what investors pay for each share directly to the company’s underlying earnings power. In general, faster growing, higher quality, and less risky companies can justify a higher PE multiple, while slower growth or higher uncertainty usually warrants a lower one.

Right now, Lithia trades on a PE of about 9.1x, noticeably below the Specialty Retail industry average of roughly 21.1x and also below the peer group average of about 13.1x. To go a step further, Simply Wall St calculates a proprietary “Fair Ratio” for each stock, which for Lithia comes out at around 16.6x. This Fair Ratio estimates what a reasonable PE should be given factors like Lithia’s earnings growth outlook, its industry, profit margins, size, and risk profile.

Because the Fair Ratio is tailored to Lithia’s specific fundamentals, it is more informative than a simple peer or industry comparison. With the shares trading at 9.1x compared to a Fair Ratio of 16.6x, the stock screens as significantly undervalued on this multiple-based view.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1463 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Lithia Motors Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, a simple tool on Simply Wall St’s Community page that lets you turn your view of Lithia Motors into a clear story, link that story to specific forecasts for revenue, earnings, and margins, and then translate those forecasts into a fair value you can compare to today’s price to help you decide how to approach the stock. The whole Narrative automatically updates as new news or earnings arrive, and it allows for very different but equally structured perspectives. For example, one investor might believe that luxury acquisitions, digital platforms, and financing scale easily justify a fair value closer to the high analyst target of around 500 dollars. Another, more cautious investor might focus on acquisition risks, margin pressure, and disruption to argue for something nearer the low target of about 310 dollars. All of this is available within an accessible, guided framework used by millions of other investors.

Do you think there's more to the story for Lithia Motors? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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