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Morningstar | Lithia Ends 2018 With Help From Used Vehicles

Lithia Motors reported good fourth-quarter results with revenue rising 10% year over year to a record $3 billion, matching consensus, while adjusted diluted EPS grew 20% to $2.57, beating consensus of $2.41. We calculate EPS growth of 12% excluding the impact of share repurchases. Same-store revenue growth of 1% came from 10% growth in used vehicles and low- to mid-single-digit growth in service and finance more than offsetting a 4% new-vehicle revenue decline. We are not changing our fair value estimate, but as always, we will reassess all modeling assumptions when we roll our valuation model for the 10-K filing.

We think the stock may have declined on earnings day because of higher selling, general, and administrative expense and the resignation of CFO John North, announced in the earnings release. North will leave March 1 after the 10-K is filed. We have known North for a long time during his nearly 20 years at Lithia, and we are sad to see him go. He was CFO only since the start of 2017 and no explanation for his departure was given in the release or on the call. Tina Miller, the firm's controller, will be principal financial officer while Lithia conducts a CFO search, so an outsider replacing North is a possibility, in our view.

Management did not give 2019 guidance, but Lithia continues to post strong earnings growth as management works to meet its goal of $15 EPS. Full-year 2018 adjusted EPS was $9.98, up 19% from 2017. The company's appetite for acquisitions is not slowing as Lithia acquired net annualized revenue in 2018 of $1.2 billion and said in its release that the acquisition environment is heating up. We asked management about international expansion plans in light of Brexit uncertainty, and CEO Bryan DeBoer's response suggested to us that the U.S. environment is so attractive right now that international expansion to Canada or the United Kingdom is more of a long-term objective than something happening soon.

Buybacks are likely to keep fueling EPS growth, as will reducing personnel and marketing costs in recently acquired stores, where SG&A as a percentage of gross profit is too high, in our view, and we think management would agree. In the fourth quarter, Lithia repurchased 2% of its stock at an average price of $70.96 per share, which we think was a good move because we believe the stock is sufficiently undervalued; $234 million of repurchase authorization remains. For all of 2018, Lithia bought back 8.5% of its stock at $84.72 per share on average.