U.S. Auto Dealerships Are on the Highway to Recovery

Doug is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There is good news for Foolish investors in the auto industry!

Low interest rates, the strengthening job market, a multi-year high level of consumer confidence, and pent up consumer demand, are fueling a strong recovery of the auto industry as it rebounds from the Great Recession days of 2008-2009.

June car sales totaled 1,402,244 vehicles, up 9% from June 2012. The seasonally adjusted annual rate, or SAAR, of sales at 15.96 million was the highest SAAR since November 2007.

Auto dealership companies have been major beneficiaries of this industry turnaround. Consequently, many auto dealership companies have reported dramatic increases in earnings from the previous year. Of these companies, one in particular stands out in terms of earnings growth: Lithia Motors (NYSE: LAD).

Lithia Motors, based in Medford Oregon, is an operator of automotive franchises. It is the ninth largest auto dealership in the U.S.

The company sells both new and used cars and trucks, including 27 brands of new vehicles and all brands of used vehicles in 91 stores in the U.S. and online. The company also arranges financing, provides replacement parts, and sells warranty and repair services.

EPS growth

This year Lithia Motors experienced record year-over-year quarterly earnings growth. In April, Lithia Motors reported net income of $0.84 per share for its first quarter, an increase of 42% from the first quarter of the previous year! This increase in earnings per share growth rate is nearly double that of the quarterly year-over-year growth rate of any of its principal competitors.

In terms of annual earnings growth, Lithia’s full-year earnings for fiscal year 2012 amounted to $2.92 per share -- a 38.02% year-over-year increase in net income.

So why is Lithia Motors EPS growth rate so exceptional? According to the company, this impressive increase in net income is indicative of the increased demand for its services, same store sales annual increases of 21% and 19% for 2012 and 2013 respectively, as well as the company’s focus on cost reduction.

The company has also continued to expand through its strategy of acquiring exclusive franchises. As recently as June, Lithia acquired the O’Brian Auto Group of Salem, Oregon. This recent acquisition alone is anticipated to add $110 million in annual revenues.

The company’s exceptional earnings growth rate has apparently been noticed by astute investors who follow the company. In 2013. the company’s share price has increased more than 44% year-to-date.

Lithia Motors is not the only company to have benefited from the turnaround in the auto industry. Three of Lithia Motors’ principal competitors in the auto dealership industry are Penske Automotive Group (NYSE: PAG)AutoNation (NYSE: AN), and CarMax (NYSE: KMX). Like Lithia Motors, these companies have also reported impressive quarterly and annual year-over-year earnings growth.

In terms of quarterly year-over-year earnings, Penske Automotive Group’s net income for the first quarter increased 23% from the first quarter in 2012. Similarly the first quarter year-over-year net incomes for AutoNation and CarMax have increased 21.8% and 23.0%, respectively.

That said, even such a quarterly year-over-year earnings growth rate is far from Lithia Motors’ record breaking 42% increase.

Further, Lithia Motors’ competitors are also lagging the company in relation to annual earnings growth.

For fiscal year 2012, Penske Automotive Group earned $2.23 per share --a very respectable 24.44% annual growth in net income. In terms of annual earnings for fiscal year 2012, AutoNation and CarMax net income increased 23.17% and 23.08%, respectively, from the previous year.

Again, while these annual earnings growth rates are impressive, they are still relatively modest in comparison to Lithia Motors’ 38.02% increase in earnings over the same period.

Looking ahead, the auto dealership companies should continue to maintain a healthy level of annual earnings growth as a result of the continued recovery of the auto industry.

Again Lithia Motors leads the pack in terms of projected earnings growth for fiscal year 2013. Its estimated annual earnings for fiscal year 2013 is $3.62 per share -- a very respectable 23.9% projected annual earnings per share growth rate!

In comparison, Lithia Motors competitors are anticipated to report more modest increases in annual earnings. Penske Automotive Group has a projected annual EPS growth rate of 14.3% for fiscal year 2013. AutoNation has a 17% projected annual EPS growth rate for 2013, while CarMax’s estimated earnings per share growth rate is an almost identical 16.6%.

While 14%, 17% and 16.6% growth rates are very respectable, they still fall short in comparison to Lithia Motors projected 23.9% annual earnings growth rate.

Without a doubt, the auto dealership industry is very competitive. Nevertheless, when it comes to past and projected earnings growth, Lithia Motors’ competitors are only visible in the company’s rear view mirror.

Given the auto industry’s continued turnaround, I highly recommend that Foolish investors keep a close eye on the auto dealership companies in general and Lithia Motors in particular.

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Doug Lofton has no position in any stocks mentioned. The Motley Fool recommends CarMax. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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