Lithia Motors (
) takes the less-traveled road than bigger auto dealerships such
) andGroup 1 (
Medford, Ore.-based Lithia prefers locations in smaller metro
or even rural areas where direct competition is thin or
It has an edge since it typically secures one of the top four
full-line car manufacturers in its territory, whether Toyota,
Chevrolet, Ford or Chrysler Jeep Dodge. It also owns other
"Our single biggest differentiator is that we operate in
exclusive markets, which means we're the only brand
representative within a 50- to 100-mile radius," said CEO Bryan
DeBoer in an interview.
But that exclusivity didn't do much good when the recession
sent new-car sales crashing. Lithia's lightly populated markets
in Western states were inordinately impacted.
Many of its top markets, such as rural Oregon, Central
California's farm belt, Boise, Idaho, and Reno, Nev., saw
new-vehicle sales fall 30% to 50% from their pre-recession highs,
Lithia closed 32 stores during the downturn to raise cash,
bringing its total down from a peak of 106 stores to 74. But as
sales picked up, it started buying dealerships again.
Its store count is now at 87, most of them west of the
Mississippi. Its five top states: Oregon, Texas, California,
Washington and Nevada.
A funny thing happened on the way down. To counter the falloff
in new-car sales, Lithia started focusing more on used cars,
which come with higher margins than new cars. It also steered
more toward commodity items, such as batteries, windshield wipers
and tires, and rolled out 30-minute quick-lube specials.
"We had to find new business opportunities, but now we will be
doing them forever," said DeBoer, who took over as CEO earlier
this year from his father Sid DeBoer, who remains executive
After three years of falling sales, revenue started picking up
in 2010, with the last 10 quarters showing double-digit
Earnings have seen even stronger acceleration. Last year, they
jumped 110% and are expected to rise 48% this year, to $2.91 a
Lithia logged its best third-quarter profit ever last year and
has posted record earnings every quarter since, DeBoer says. In
Q3, earnings jumped 48% from the year prior to 90 cents a share.
Revenue rose 24% to $888.4 million.
And since it's usually the only dealer in a market with its
particular brand, "we have the next five years of profits built
in through service and parts," DeBoer says.
Chrysler is Lithia's top brand, which could be a good thing or
a bad thing. DeBoer says Chrysler sells lots of light trucks,
which are popular in its rural markets.
And since Chrysler's vehicles are often "value purchases," it
can get a better deal when looking to buy a dealership.
But Morningstar analyst David Whiston warns clients that
Lithia's "significant exposure" to Chrysler could be a problem if
Fiat's integration of Chrysler fails in the U.S.
"As long as Chrysler remains viable, we think Lithia's
prospects are excellent," he added.
Overall, new-car sales are on the rise. Seasonally adjusted
annual sales in the U.S. are seen growing from last year's 12.8
million units to 14.5 million this year, though that's still
below the 16.5 million to 17 million prior to the downturn.
Since many of Lithia's markets are still down, it'll have more
upside when new-car sales fully recover, DeBoer says.
KeyBanc Capital Markets analyst Brett Hoselton expects Lithia
to continue to outperform the U.S. light vehicle market. He noted
in a report that the firm's same-store new vehicle unit sales in
Q3 were up 30% vs. the U.S. rate of 15%.
But he expects continued "slight deterioration" in new-car
profit per unit into 2013 due to competitive pricing to ensure
higher volume and, in turn, improved trade-in stock for its
But a new-car sale is only one-half to one-third of the profit
of each car, DeBoer says. Consumers typically keep a car four to
six years and come in three to five times a year for other
services, he says.
"A new-vehicle sale starts the process," he said. "We make one
or two times more in what we call the fixed operations, which we
call an annuity stream, the repairs and maintenance."
Still, analysts forecast slower profit growth, 11%, in each of
the next two years, according to Thomson Reuters.
Analyst Rick Nelson of Stephens Inc. says forecasts "probably
haven't baked in acquisitions" and analysts may be
underestimating same-store sales growth potential.
"The last two years they have acquired five or six stores each
year," he said in an interview.
Lithia plans to keep on buying dealerships, and is even
looking outside its core Western region to locations east of the
Since it likes to stick to smaller markets, it typically deals
with mom-and-pop dealers who own just one or two franchises.
That means it's able to buy dealerships at "attractive
prices," DeBoer says. "We're definitely value shoppers," he
"Lithia fishes in a different pond than everybody else," said
Nelson. "The other publicly traded auto dealers are making
acquisitions in bigger markets."
Management is targeting 10% to 15% annual growth just through
acquisitions. Nelson says the firm should generate cash flow of
$65 million to $70 million next year, enabling it to buy an
additional $350 million to $700 million in revenue.
"There are 50 markets in the Western states that fit their
profile and 150 markets east of the Mississippi that fit their
profile," he said, meaning smaller markets with an exclusive car
franchise in them.
Higher sales will lead to even higher growth rates in earnings
because the company is good at keeping costs down, analysts
"If they can grow same-store sales 10%, we think profits can
grow 20%," Nelson said.