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 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.