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Lithia Motors Prices Offering of $400M Senior Notes Due 2027

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Lithia Motors, Inc. (LAD - Free Report) , on Dec 2, priced an offering of $400 million in total principal amount of 4.625% senior notes, due 2027. This private offering, exempt from the registration requirements of the Securities Act of 1933, is anticipated to close on Dec 9, subject to customary closing conditions.

Lithia Motors plans to use the net proceeds from this private offering for paying down the outstanding amounts under the revolving line of credit of the company’s credit facility. The remaining amount is likely to be spent on funding acquisitions, capital expenditures and other debt repayments.

Debt Profile

Exiting third-quarter 2019, the company had long-term debt of $1.29 billion. Its floor-plan interest expenses were $17.9 million in the quarter compared with the year-ago quarter’s $16 million and other interest expenses amounted to $14.8 million, down from the prior quarter’s figure of $15 million. The current notes offering is expected to reduce indebtedness.

Existing Business Scenario

Lithia Motors has been benefiting from strength in its new-vehicle, used-vehicle, and service, body and parts businesses, courtesy of the acquisition gains and expanding physical network. The company expects these tailwinds to consistently bolster its revenues in the remaining of the current year.

Furthermore, the company acquired John Howard Subaru, Waterfront Jeep and Urse Chrysler Dodge Ram Fiat in Morgantown, WV, this October. So far this year, Lithia Motors has acquired seven stores. These are expected to generate revenues of more than $475 million. Recently, the company activated proprietary technology in the Pittsburgh market. These scalable, digital solutions are anticipated to drive improvements and efficiencies across Lithia Motors’ network.

Impressive cash-generating ability and limited capex requirements help Lithia Motors generate free cash flow, which is a key metric to gauge a firm’s financial health. Notably, the company generates around $250 million of FCF annually and utilizes it for accretive acquisitions, reinvestment opportunities, along with shareholder-value creation.

Lithia Motors’ investor-friendly moves via dividend payouts and share buybacks boost investors’ confidence. In the recently-reported quarter, the company approved a dividend of 30 cents per share.

In the past six months, Lithia Motors has yielded a return of 33.8% compared with the industry’s 24.6% growth.

However, persistent rise in SG&A expenses, primarily due to acquisition costs and insurance reserves, may hamper Lithia Motors’ net income in the future. Also, rising competition and increasing price transparency can result in lower selling prices, thereby dampening the company’s profits.

Zacks Rank & Other Stocks to Consider

Currently, Lithia Motors sports a Zacks Rank #1 (Strong Buy).

Other top-ranked stocks in the Auto-Tires-Trucks sector are BRP Inc. (DOOO - Free Report) , Spartan Motors, Inc. (SPAR - Free Report) and SPX Corporation (SPXC - Free Report) . While BRP flaunts a Zacks Rank #1, Spartan Motors and SPX carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

BRP has a projected earnings growth rate of 19.33% for the current year. Its shares have gained around 47.9% over the past year.

Spartan Motors has an estimated earnings growth rate of 85.42% for the ongoing year. The company’s shares have surged 131.4% in a year.

SPX has an expected earnings growth rate of 23.18% for 2019. The company’s shares have appreciated 71.6% in the past year.

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