ZACKS·2025-05-12 12:40Core Viewpoint - Carvana and Lithia Motors represent two distinct strategies in the U.S. auto retail sector, with Carvana focusing on a digital-first model for used vehicles and Lithia combining new and used vehicle sales with a physical dealership network [1][2] Group 1: Carvana - Carvana is the second-largest used car retailer in the U.S., known for its automated car vending machines and a fully digital sales model [3] - The company has exceeded earnings expectations for four consecutive quarters, selling over 100,000 cars each quarter, with a 45.7% year-over-year increase in retail units sold in Q1 2025 [4] - Carvana achieved a record adjusted EBITDA of approximately $488 million, with an EBITDA margin of 11.5%, significantly higher than the industry average [5] - The company is positioned to benefit from rising new car prices, as its used-car model may become more attractive to consumers [6] - However, Carvana's financial health is concerning, with $5.26 billion in long-term debt and a debt-to-capital ratio of 0.75, which is well above the sector average [7] - Long-term goals include selling 3 million retail units annually with an adjusted EBITDA margin of 13.5% within 5 to 10 years, indicating confidence in scaling its operations [8] Group 2: Lithia Motors - Lithia Motors is one of the largest auto retailers in the U.S., with a diversified business model that includes new and used vehicle sales, aftersales services, and financing, which helps mitigate risks [9] - The aftersales segment contributes about 40% of gross profit and is expected to benefit from consumers holding onto vehicles longer due to tariff impacts [9] - However, Lithia faces tariff risks, as new vehicle sales account for about half of its revenue, leading to potential margin pressure due to rising costs [10] - Lithia has aggressively expanded, adding nearly $10 billion in annualized revenues through acquisitions in 2023 and 2024, and is enhancing its digital platforms [11] - The company has strong cash flows, with a 25% annualized cash flow growth, and has recently increased its dividend by 4% [12] - Lithia's long-term debt stands at $5.9 billion, with a debt-to-capital ratio of 55%, which could limit future investments [13] Group 3: Price Performance and Valuation - Year-to-date, Carvana shares have increased by approximately 32%, while Lithia's stock has decreased by 14.5% [16] - Carvana's forward sales multiple is 2.96X, significantly above its median of 1.60X, while Lithia's forward sales multiple is 0.2X, slightly below its median of 0.22X [17] - The Zacks Consensus Estimate for Carvana's 2025 sales and EPS indicates year-over-year growth of 230% and 166%, respectively, while Lithia's estimates imply increases of 7.7% and 12.8% [21][22] Conclusion - Carvana appears better positioned for future growth due to its digital-first model and strong sales momentum, while Lithia's diversification offers stability but faces challenges from tariffs and high debt [24][25]