We recently compiled a list of the 7 Best Auto and Truck Dealership Stocks to Buy. In this article, we are going to take a look at Lithia Motors, Inc. (NYSE:LAD) stands against the other auto and truck dealership stocks.
US Car and Truck Dealership Market
The auto dealership market is one of the key segments of the greater automotive industry. According to a report by Verified Market Research, the auto dealership industry was valued at $257.30 billion in 2023. The market is forecasted to grow at a compound annual growth rate of 4% to reach $338.6 billion by 2030.
The auto dealership market is a consumer-centric industry, which revolves around customer confidence, inflation rates, interest rates, and the overall regulatory environment. According to a press release by Reuters on July 26, the US car market is facing headwinds due to weak prices, high inventories, and difficulties in logging profits.
The slowed market environment has hit shares of major auto manufacturers and car dealerships nationwide. On top of the macro environment challenges, the market was hit by cyber attacks in June 2024. On June 20, CNN reported that the US and Canadian dealership market stood still due to a cyber attack incident at a data provider called CDK Global. CDK Global data is used by more than 15,000 auto dealers across all major countries. While not all auto dealers use CDK to process orders, those that did faced slower sales growth during the quarter.
As per Reuters, the overall new vehicle sales throughout the US in June 2024 stood at 1.32 million units, representing a seasonally adjusted annualized rate of 15.29 million units during the year. Moreover, affordability also remains one of the key concerns for the market, due to which inventories are not expected to advance as strongly as they did over the past 12 months.
Looking ahead, according to the latest Cox Automotive Dealership report on June 10, the Cox Automotive Dealer Sentiment Index (CADSI) remained stable from the first quarter to the second quarter of 2024. The current market index score for Q2 is 42, which suggests that US auto dealers perceive the market to be weak. For context, the score was 45 a year ago and below the threshold of 50. Moreover, the current market expectation shows a decline in market expectations for the next three months, as the market outlook has dropped from a score of 51 in Q1 to 44 in Q2. The downward trend is attributed to the weaker tax refund season and the ongoing political instability due to elections. To read more about the automotive industry you can look at the 7 Best Small Cap Automotive Stocks to Buy.
Our Methodology
To compile our list of the 7 best auto and truck dealership stocks to buy, we used the Finviz stock screener. We selected Auto & Truck Dealership industry to get a consolidated list of stocks. Next, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A customer in a store, examining a new vehicle on the showroom floor.
Lithia Motors, Inc. (NYSE:LAD)
Number of Hedge Fund Holders: 39
Lithia Motors, Inc. (NYSE:LAD) is another Fortune 500 company and one of the best auto and truck dealership stocks to buy. It was held by 39 hedge funds during Q1 2024 with total stakes worth $2.15 billion.
Lithia Motors, Inc. (NYSE:LAD) is an international automotive retailer that operates through two main business models namely Vehicle Operations and Financing Operations. The company through its Vehicle Operations segment sells new and used vehicles and provides parts, repair and maintenance services. On the other hand, the Financing Operations provide vehicle finance and insurance products along with financing for buying and leasing retail vehicles. Lithia Motors, Inc. (NYSE:LAD) operates through its portfolio of renowned brands including Driveway and Greencars at numerous physical locations and through e-commerce platforms. As of December 2023, the company operated in more than 340 locations with 44 brands in the US, UK, and Canada.
The company posted a robust second quarter of 2024, with all-time high quarterly revenue and the first quarter of profitability in the Financing Operations division. Revenue grew by 14% year-over-year to an all-time high of $9.2 billion. Moreover, Financing Operations generated $7.2 million in income during the quarter, compared to a loss of $18.7 million in the previous year. Strong performance in same-store sales and cost-saving measures by management resulted in improved margins and record revenue for the quarter.
The strategic edge of the company lies in its vast physical network that spans three major automotive markets. The company entered into strategic partnerships to improve its market share recently. Lithia Motors, Inc. (NYSE:LAD) purchased a minority stake in Wheels, which is a fleet management company in North America. Moreover, the company is also working towards improving its online presence. The digital platform of the company witnessed a 2% increase in monthly unique visitors, reaching 12 million per month.
Lithia Motors, Inc. (NYSE:LAD) presents an attractive entry point for value investors. The stock is currently trading at 10 times its forward earnings, a 34% discount to its sector. The company has a solid history of growth. Its revenue and net income have grown by 23% and 22% over the past 10 years. Moreover, with more than $941 million in cash and cash equivalents and management’s aim to save $150 million in annualized SG&A, there is significant room for growth. Wall Street is bullish on the stock. 15 analysts have a consensus Buy rating and their median price target of $335 represents an upside of 20% from current levels.
Here is what Bonhoeffer Capital Management has to say about Lithia Motors Inc. (NYSE:LAD) in its Q1 2023 investor letter:
Asbury and Lithia have the highest earnings growth driven by growth via consolidation. All of the firms have had a reduction in PE over the last 10 years. The question is: will these historical trends continue? There is a large TAM for continued consolidation, and given the PEs (6-8x earnings) today, buybacks will be accretive to all of these firms. I think the historical trends are intact and will continue into the future; thus, I am bullish on growth for the consolidation-focused automobile dealers.
Overall LAD ranks 3rd on our list of the best auto and truck dealership stocks to buy. You can visit 7 Best Auto and Truck Dealership Stocks to see the other auto and truck dealership stocks that are on hedge funds’ radar. While we acknowledge the potential of LAD as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LAD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
Disclosure: None. This article is originally published at Insider Monkey.