Third Quarter results for Lithia Motors Revealed

Lithia Motors reported all-time record results of $1.13 per share for adjusted diluted earnings per share from continuing operations. This mark beat consensus by $0.03, and another healthy mid-digit percentage increase in same-store revenue year over year also enabled the company to beat on revenue. Despite what we see as a very strong quarter, management’s comments on more growth coming from acquisitions and the introduction of 2014 full-year EPS guidance of $4.15-$4.25 (well below consensus of $4.45) means we will be reducing our fair value estimate by 10%-15% but keeping our moat rating in place.

During the call, management spoke about accelerating M&A since the environment is ripe for deals and noted that more growth would come from increasing share rather than organic growth. We think these comments indicate that Lithia will take share via acquisitions and thus may be willing to pay a higher multiple than in the past to fuel growth. Although we do not expect management to overpay, we will be increasing the assumed price to sales multiple that Lithia pays for acquisitions over the next five years, which will lower our fair value estimate.