Lithia Motors Feels Weak Market

Lithia Motors, Inc. (LAD - Snapshot Report) is a growing retailer in the U.S. automotive industry. The company is focused on improving productivity, which should propel earnings growth.

Our major concerns are the general health of the overall industry, exposure to Ford (F - Analyst Report), General Motors (GM) and SUVs as well as the volatile interest rates. Moreover, high gasoline and diesel prices are affecting the company's operations. This resulted in declining sales volumes.

But the company is well-positioned to continue its aggressive acquisition campaign, as it has a solid balance sheet, with good liquidity and high interest coverage. The company focuses on its acquisition strategy and has greater access to financial resources than most private competitors.

Parts and service revenues and profits continue to grow. The company's lifetime oil change contracts have a 39% penetration rate among car sales. On June 4, Lithia Motors announced that the Board of Directors has approved a dividend of $0.14 per share for the second quarter. Lithia Motors will pay the dividend to shareholders of record on July 15.

The company is accelerating cost cuts. In addition to the announced $6 million annualized cuts, it plans $18 million in annualized additional savings.

But weak overall auto sales in 2008 could impact this retailer. For fiscal 2008, the company projected its same-store sales to decline by 5%-6%. Currently, the company is trading at 6.9x our 2008 EPS estimate of $1.00. Lithia is trading at a discount to the peer group median multiple and industry median multiple. Thus, we rate the stock a Hold with a six-month target price is $7.50, which is 7.5x our 2008 EPS estimate.

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