Investing can sometimes be scary, especially if you take a contrarian stance. For example, at present, anything even tangentially related to the automotive space is considered scary for many market players. However, the shares of these companies often trade at very low levels a valuation perspective. While certainly not the most attractive player out there, Lithium engines (NYSE:LAD) is trading at cheap levels and certainly worth some consideration. While I think there are better places to put your money if you like this market segment, I still believe the company deserves a “buy” rating.
Performance remains strong
In April of this year, I wrote an article that viewed Lithia Motors in a favorable light. The strong fundamental performance of the company leading up to the publication of this article, combined with the weak share price, led me to call it a “buy”, even though management had announced weaker financial results. than expected for the first quarter of 2022. fiscal year. Since then, the shares have fallen 30.9%. This compares to the 20.1% decline recorded by the S&P 500 over the same period.
For some, the idea of buying shares of a company that owns car dealerships may seem crazy when the economy could very well suffer in the future and at a time when interest rates and inflation increase. But even if the company’s financial performance were to deteriorate, I remained confident that the company would be no worse off than it was worth. Although stocks have since fallen, I remain confident in my analysis. And to illustrate to you exactly why, I only have to look at the data provided by the company for the second quarter of its fiscal year 2022. This is the only quarter for which we did not have data when I last written about the company, but we have data today.
During this quarter, sales to the company were $7.24 billion. This is 20.5% more than the $6.01 billion generated in the same quarter a year earlier. The main driver of the business appears to have been revenue from the retail sale of used vehicles. Revenue there jumped 38.3%, from $1.80 billion to nearly $2.50 billion. The increase came as the number of used vehicles sold through its retail operations jumped 15.3%, from 70,254 to 81,026. The company also benefited from an increase 19.9% of the average sale price of used vehicles, a figure that rose from $25,691 to $30,814. Retail sales of new vehicles increased more modestly by 3.3%, from $3.15 billion to $3.25 billion. The total number of units sold fell 8.5%, but the average price jumped 13%. The company also saw revenue growth in other areas. Financing and insurance revenues increased by 22.6%, from $269.6 million to $330.4 million. Meanwhile, service, body and parts revenue also increased, rising 31% from $521 million to $682.6 million.
This increase in revenue led to increased profits for the company. Net income for the last quarter totaled $331.3 million. This compares favorably to the $304.9 million recorded a year earlier. However, we need to dig a little deeper to understand why this happened. For example, used vehicles sold by the company saw their profits fall by 11.1%. At the same time, the unit gross margin for new vehicles increased by 43.1%. The business also benefited from a 19% increase in gross profit per retail unit under the finance and insurance arm of the business. Despite these improvements, cash flow from operations fell from $771.5 million to negative $289.4 million. But if we adjust for changes in working capital, it would actually have gone from $377.2 million to $425.8 million. This disparity makes a lot of sense considering that the company paid more to store its inventory. And that’s where a legitimate bear concern comes in. In the event that the market weakens significantly, can the company unload its vehicles without incurring losses? But I digress. Over the same period, we also saw the company’s EBITDA improve from $492.3 million to $558 million. In the chart above, you can see not only the profitability side of things, but also the revenue side for the entire first half of fiscal 2022 versus the first half of fiscal 2021. In this case, you can see equally strong results year over year.
We also need to pay attention to pro forma financial results. The fact is that Lithia Motors has always been active in growth through acquisitions. Accordingly, the company publishes pro forma financial results assuming that the acquisitions in which it has engaged have been effective over the entire period under review. This data for the last quarter and for the first half of fiscal years 2022 and 2023 as a whole, can be seen in the graph above. Unfortunately, we have nothing but income and net income here. Management has not provided cash flow data on a pro forma basis.
Given these pro forma numbers, and assuming that we can annualize the results achieved so far for each year, I was able to effectively assess the business. On a forward-looking basis, the price/earnings ratio would be 4. The price/adjusted operating cash flow ratio would be 3.1, while the EV/EBITDA multiple would be 4.4. If we use FY2021 data instead, those numbers would be 5.5, 4.5, and 9. For those particularly bearish about the industry as a whole, I’ve also pegged the company’s price assuming financial performance were to come back to what the company did in its 2020 fiscal year. 8 and 14.3, respectively.
As part of my analysis, I also compared the company to five similar companies. In this case, I used fiscal year 2021 data for each of these companies and compared it to Lithia Motors’ 2021 pro forma results. On a price/earnings basis, these companies ranged from a low of 6.1 to a high of 7.2. In this case, our prospect was the cheapest of the bunch. Using the price/operating cash flow approach, the range was between 2.7 and 7, with two of the five companies being cheaper than Lithia Motors. And when it comes to the EV to EBITDA approach, the range is between 5.6 and 9.6. In this scenario, four out of five prospects were cheaper than our target. Even though we use official 2021 results instead of pro forma numbers, Lithia Motors’ placement relative to other companies remains unchanged when viewed through the lens of price-earnings multiple and price-cost. operation. multiple flow. The company’s placement only changes with respect to the EV/EBITDA multiple, with three of the five companies now being cheaper than it.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Penske Automotive Group (PAG)||7.2||6.6||6.7|
|Automotive Sonic (SAH)||6.1||7.0||7.3|
|Asbury Automotive Group (ABG)||6.5||3.0||9.6|
|Group 1 Automotive (GPI)||6.5||2.7||6.2|
From a purely pricing perspective, shares of Lithia Motors look very attractive. This is true even if the prices compared to similar companies are all over the place. I have no doubt that the industry itself will face significant headwinds in the near term. This could alternatively further punish shareholders. But for those focused on acquiring a low-cost business that has attractive long-term potential, I think Lithia Motors is a solid buying prospect, even if it’s not the most attractive in his space.