Lithia Motors Is Up 60% In 2020: Will The Gains Continue?

After more than a 63% rise this year, at the current price near $240 per share, we believe Lithia Motors stock (NYSE: LAD) can continue its growth. LAD stock has increased from $147 to $240 since the start of the year compared to the S&P 500 which increased almost 2.5% in 2020. The stock has outperformed the market and was at a 52 week high in early October. This is despite the fact that the revenues have fallen 3% to a consolidated figure of $6,379 Mil for the last 2 quarters from the consolidated figure of $6,554 Mil a year ago. The major reason behind this is the huge improvement in earnings which are up 63% to a consolidated figure of $10.35 from the consolidated figure of $6.32 a year ago.

The company has seen growth in revenue over recent years, while its P/E multiple has increased substantially. We believe the stock is likely to continue growing in the near term. Our dashboard Buy Or Sell Lithia Motors Stock? provides the key numbers behind our thinking.

Lithia Motors’ revenue increased 7% from $10.1 billion in 2017 to $12.7 billion in 2020. This was offset by margins decreasing from 2.4% to 2.1% during this period. On a per share basis, earnings went up from $9.78 to $11.70.

During the same period, the P/E multiple increased from 12x to 13x. The P/E jumped in 2020 as the company, contrary to the sector, has been reporting record earnings despite a small fall in revenue. Currently the multiple stands at 21x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Lithia Motors’ revenues took a small hit for the first half of 2020 but reported positive revenue growth of 8.6% in Q3 2020. The company also reported the highest ever quarterly earnings of $6.95 in Q3 2020 which continued to support the stock price growth.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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