Lithia Motors(LAD) ZACKS·2025-01-09 08:26Core Viewpoint - The Zacks Auto Retail and Wholesale industry is facing challenges due to declining profit per unit and high vehicle financing costs, but companies like Lithia Motors, Group 1 Automotive, and Asbury Automotive are expanding their digital and physical presence to adapt to these conditions [1]. Industry Overview - The automotive sector's performance is heavily reliant on retail and wholesale networks, which include dealerships and retail chains that sell new and used vehicles, light trucks, auto parts, and provide repair and maintenance services [2]. Economic Factors - As a consumer cyclical industry, the automotive sector's success is closely linked to economic conditions. High disposable income encourages spending on big-ticket items, while tighter budgets lead to reduced discretionary spending [3]. - The COVID-19 pandemic has accelerated the industry's shift towards e-commerce, which is expected to continue [3]. Sales Trends - Internal combustion engine (ICE) vehicle sales are projected to decline, reaching a record low of 75% of total sales volume in 2025, while electric and hybrid vehicle sales are expected to rise [3]. - Dealers with ICE inventories may need to lower prices to prevent inventory build-up, potentially impacting their profit margins [3]. Financing Environment - High-interest rates are causing customers to delay vehicle purchases, as the cost of vehicle financing remains elevated despite recent interest rate cuts by the Federal Reserve [4][5]. - The Fed's interest rate is currently in the range of 4.25-4.5%, significantly higher than the pre-pandemic level of around 2% [5]. Market Presence and Strategy - Auto dealers are expanding their market presence through strategic acquisitions, which enhance their market share and portfolio [6]. - A strong digital presence is also helping these companies reach a broader customer base, thereby improving profitability [6]. Industry Performance - The Zacks Auto Retail & Wholesale industry ranks 177, placing it in the bottom 29% of approximately 250 Zacks industries, indicating weak near-term prospects [7][8]. - The industry's earnings estimates for 2025 have declined by 30.80% over the past year, reflecting a negative outlook [9]. Stock Market Performance - The Zacks Auto Retail & Wholesale industry has underperformed compared to the S&P 500 and the broader Auto, Tires, and Truck sector, with a return of 8.7% over the past year, while the sector and S&P 500 grew by 26.2% and 26.9%, respectively [11]. Valuation Metrics - The industry is currently trading at an EV/EBITDA ratio of 8.39X, compared to the S&P 500's 18.67X and the sector's 22X [12]. Company Highlights - Lithia Motors, Inc. (LAD): A leading automotive retailer with a diversified product mix and multiple income streams, benefiting from its Driveway e-commerce platform and strategic acquisitions. The Zacks Consensus Estimate for 2025 sales and EPS implies year-over-year growth of 8.08% and 17.74%, respectively [13][14]. - Group 1 Automotive, Inc. (GPI): A major automotive retailer with a diversified portfolio, focusing on dealership acquisitions to enhance growth. The Zacks Consensus Estimate for 2025 sales and EPS implies year-over-year growth of 11.33% and 5.27%, respectively [15][16]. - Asbury Automotive Group, Inc. (ABG): One of the largest automotive retailers, leveraging its Clicklane e-commerce platform for online transactions. The Zacks Consensus Estimate for 2025 sales and EPS implies year-over-year growth of 2.70% and 7.23%, respectively [17][18].