Why Lithia Motors, Inc. (NYSE:LAD) Could Be Worth Watching

Lithia Motors, Inc. (NYSE:LAD), is not the largest company out there, but it saw a decent share price growth in the teens level on the NYSE over the last few months. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Today I will analyse the most recent data on Lithia Motors’s outlook and valuation to see if the opportunity still exists.

See our latest analysis for Lithia Motors

What Is Lithia Motors Worth?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Lithia Motors’s ratio of 5.86x is trading slightly below its industry peers’ ratio of 9.92x, which means if you buy Lithia Motors today, you’d be paying a reasonable price for it. And if you believe Lithia Motors should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. Is there another opportunity to buy low in the future? Since Lithia Motors’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What does the future of Lithia Motors look like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. With profit expected to grow by a double-digit 17% over the next couple of years, the outlook is positive for Lithia Motors. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What This Means For You

Are you a shareholder? LAD’s optimistic future growth appears to have been factored into the current share price, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at LAD? Will you have enough confidence to invest in the company should the price drop below the industry PE ratio?

Are you a potential investor? If you’ve been keeping tabs on LAD, now may not be the most optimal time to buy, given it is trading around industry price multiples. However, the positive outlook is encouraging for LAD, which means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

If you want to dive deeper into Lithia Motors, you'd also look into what risks it is currently facing. To help with this, we've discovered 2 warning signs (1 is a bit concerning!) that you ought to be aware of before buying any shares in Lithia Motors.

If you are no longer interested in Lithia Motors, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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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.