3 Retail Stocks to Buy on Bottom-Line Expansion: Lithia Motors Inc (LAD) and More

Recently, I have been writing on a few well known names in the hard-line retail industry. My focus has been especially on players in the retail-automobile industry. This article also briefly discussed two retail-automobile players. However, this time the focus is not only on rising sales due to a rising US SAAR (which is the car sales in the US), but also on bottom-line improvement due to efficiency. Taking advantage of this theme in retailers (I mean bottom-line expansion), I have taken the liberty to add a non automobile retailer to the article that is expected to witness bottom-line expansion in the future.

Lithia Motors Inc (NYSE:LAD)Lithia Motors Inc (NYSE:LAD): Lithia remains one of the favorite small-cap names in the retailer industry. Lithia Motors offers among the greatest earnings upside to improving new vehicle SAAR and has meaningful organic and acquisition growth potential, which combined with its sector-low valuation make it a compelling story. Calculations show a 10% potential upside to 2013 numbers on stronger sales and expense leverage.

There are several key strengths to the story: The company’s market exclusivity, substantial expansion potential, and rigorous expense disciplines, which are driving the company’s industry-leading flow through, seem some attractive points to bulls. CEO Bryan DeBoer’s intense focus on analytics, personnel, and execution should help the company further enhance its efficiency in 2013. I recommend the stock as a buy. Credit Suisse has a current target price of $50 on the stock, which is ~17% upside from the current levels.

Penske Automotive Group, Inc. (NYSE:PAG): Penske is poised to perform well in 2013. The company is coming off one of its best results in 2012, despite having inventory issues with a couple of key brands. Comps were strong, gross profit per unit was resilient, and expense leverage showed improvement. The company’s European business, while not as strong as the U.S., performed surprisingly well despite economic and inventory issues. More of the same is on tap for 2013 from a sales and margin perspective.

In addition, the company is slowly buying out some of its leases, which should result in positive earnings arbitrage while enhancing operating leverage. The expensive leases are being converted into less pricey mortgages, eliminating the associated rent expense and dropping a smaller amount of mortgage interest below the line. The Street estimates mid-teens to high-teens EPS growth for the company in 2013 and believes that the stock should be up a similar amount. Credit Suisse has set a target price of $38, which means an upside of ~20% from current levels.

Dicks Sporting Goods Inc (NYSE:DKS): Dick’s Goods is relatively well-positioned to outperform in 2013, even though the weather will likely not be a friend for the second year in a row. The company’s healthy product trends (absent the weather noise) combined with a number of gross margin drivers could lead to upside to the current consensus estimate of $2.92 in 2013. The system improvements present the most significant opportunity in 2013 and 2014, as the company focuses on regional pricing and better markdown management. In addition, margins should benefit from continued growth in private label, significant price optimization, zone pricing, and regional merchandising opportunities, which should move margins through the 10% range in the near future.

While the stock has moved back up, the stock is still trading below a 17x multiple on FY 14 consensus EPS. The current valuations could point to another 5-10% upside to the stock. However, past the near term, risks include improvements and/or accelerating store growth of direct big box competitors, rising e-commerce penetration in the sporting goods category, including moves from Amazon.com, Inc. (NASDAQ:AMZN), and premium brands focusing more on direct distribution or expanding distribution to other channels. These threats could become material later in 2013.

Foolish Bottom Line

Bottom-line expansion seems to be a common theme in the retailers, which is expected to bring a rally in this industry in 2013.

The article 3 Retail Stocks to Buy on Bottom-Line Expansion originally appeared on Fool.com and is written by Masam Abbas.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!