Since September 2024, Lithia has been in a holding pattern, posting a small return of 1.5% while floating around $319.87.
Is now the time to buy Lithia, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
We're sitting this one out for now. Here are three reasons why we avoid LAD and a stock we'd rather own.
Why Is Lithia Not Exciting?
With a strong presence in the Western US, Lithia Motors (NYSE: LAD) sells a wide range of vehicles, including new and used cars, trucks, SUVs, and luxury vehicles from various manufacturers.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Lithia’s demand has been shrinking over the last two years as its same-store sales have averaged 2.8% annual declines.
2. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.
Lithia has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 16% gross margin over the last two years. Said differently, Lithia had to pay a chunky $84.02 to its suppliers for every $100 in revenue. 
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Lithia’s $13.86 billion of debt exceeds the $402.2 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $1.83 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Lithia could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Lithia can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Lithia isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 9.1× forward price-to-earnings (or $319.87 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of Lithia
The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.
Take advantage of the rebound by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.
