Lithia Motors (LAD), mcap=$7000m

LAD pitch:
– Auto dealer Lithia Motors is undervalued due to concerns over short-term earnings and long-term disruption to the industry.
– Trades at 5xEPS.
– Market is skeptical about earnings sustainability, which went from $11.60/share in 2020 to $37/share in 2021 and likely $45/share in 2022.
– Part of this growth was driven by COVID supply chain issues.
– Earnings are unlikely to revert to 2020 levels due to a 60% higher number of locations as well as new business initiatives (captive finance sub and Driveway online national brand) reaching breakeven.
– The industry is highly fragmented, and Lithia is in a unique position to grow profitably through acquisitions for the foreseeable future.

LAD valuation:
– Trades at a depressed 5.0 x 2022E EPS, and 3.8x to 4.5x management’s 2025 EPS target of $50 to $60.
– Stock’s multiple is likely to revert to its historical median of 12.5x forward earnings yielding a $625 to $750 share price in two years.

Exp. gain: +250% to $700/share in two years.

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