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.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 9 Most Dangerous Countries for Tourists to Visit

Reign of Terror: The 10 Most Ruthless Politicians in History

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

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!