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Author: TurnerTN Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 7  
Subject: Re: Earnings soon Date: 8/10/1999 11:37 AM
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This is a phenomenal company (obviously I'm long). Their valuation is cheap relative to growth, industry, competition, etc. They are the best run auto consolidator from an operational basis because the management team consists of "car guys", not people from Sears, or Waste Management, etc. (poke, nudge)

The stock has fallen lately to around $19.50 per share on concerns about slowing auto sales and competition from the Internet. The risk here is that if the acquisition well dries up, they will not be able to sustain their high rate of growth. This does not mean, however, that they will not grow, just not as fast thereby reducing their ability to command a high PE (which they have yet to attain even with their strong results). On the flip side, if acquisitions continue at the historical pace (all indications show that they will as the industry is still extremely fragmented), the upside potential for a stock such as Lithia (LAD) is huge.

Remember, the Internet only directs buyers to dealers, it does not take sales away from them...and it particularly benefits the larger dealers such as the consolidators. As for slowing car sales, we're still on pace for a record year even if the 2nd half is slower than the 1st. Due to new lease programs and technological innovations, people are turning cars over more frequently than they used to (about 3 years vs. 5 years), so, couple this with a growing population and its easy to see how we can sustain higher than historical levels of car sales.

In an economic slump, people will turn to used cars rather than used, so companies such as Lithia that have a strong used car sales program (about 30% of sales vs. 15% to 25% for their competition) will be able to better handle a reduction in economic prosperity.

Additionally, a company such as Lithia buys underperforming car dealers. This is a crucial difference to companies such as AutoNation (AN) who purchase so-called "trophy" stores with little room for improvement. In buying underperforming dealers, Lithia is able to produce increased results without increases in unit sales simply by shoring up the operations of the underperforming dealer (increasing gross and pre-tax margins to the levels of the parent company). They do this by focusing on Finance & Insurance sales, Parts & Service sales, and Used car sales (all carry high margins than new cars). They also accomplish this through employee incentive programs, installing their information systems, etc.

Therefore, they accomplish growth through the acquisition, they accomplish accretion to earnings as a result of acquiring dealers for 5 to 10 times earnings while their stock trades at 15 to 20 times earnings (and the fact that Lithia has such a strong balance sheet and cash flow, they generally pay at least 50% of the acquisition price in cash), and they accomplish "icing on the cake" growth by improving the operations of the acquired dealers.

Lithia's margins, both operating (16%) and more importantly, pre-tax (2.5%) are the best of the publicly traded auto retailers. Their debt to capitalization (36%) is the best and their goodwill to total assets (17.5%) is the best. The company also has the best earnings track record, beating analysts estimates for 11 straight quarters (every quarter since becoming a public company).

The company is estimated to earn in excess of $1.65 next year without additional acquisitions, they are on pace to earn $1.47 per share this year vs. $1.14 per share last year and $0.82 in 1997. Revenues will be about $1.2 billion this year from $714 million last year and $199 million in 1997.

The numbers speak for themselves, and remember, earnings ultimately drive stocks higher. Go LAD!
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