On Thursday, Stephens initiated coverage on Lithia Motors (NYSE:LAD) stock, the leading automotive dealership group, with an Overweight rating and a price target of $360.
The new rating is based on an enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple of 7.8 times the firm's 2025 EBITDA estimate.
This multiple is slightly below the company's long-term average of 8.7 times, reflecting a cautious stance due to potential uncertainties surrounding Lithia Motors' expansion strategy.
The analyst pointed out that Lithia Motors has been the most ambitious of the Public 6 dealerships in terms of growth and acquisitions. Lithia Motors is also the largest in the group in terms of EBITDA, currently at approximately $1.6 billion.
The company's aggressive growth has been marked by its expansion into captive finance, which now represents over 10% of its total U.S. vehicle sales, and a history of consistent dealership acquisitions over the past 15 years, particularly in the last five.
Lithia Motors' acquisition strategy has been complemented by its share repurchase program, with around 21% of its shares bought back since 2019, including about 3% in the last twelve months. The company also offers a modest annual dividend, yielding less than 1%.
The analyst forecasts that Lithia Motors will continue to reduce its share count by approximately 4% in 2024 and 2% in each of the following two years.
In addition to share repurchases, Lithia Motors is expected to acquire $1 billion in annual revenue in both 2025 and 2026, aligning with its long-term goal of acquiring $2 billion to $4 billion in annual revenue.
The forecast also includes an estimation that by the end of 2025, Lithia Motors will hold around $60 per share in unencumbered, self-financed auto receivables, which have not been included in the valuation methodology or the price target.
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