Yahoo Finance Lithia Motors Stock Shows Every Sign Of Being Significantly Overvalued
- By GF Value
The stock of Lithia Motors (NYSE:LAD, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $379.93 per share and the market cap of $10.2 billion, Lithia Motors stock gives every indication of being significantly overvalued. GF Value for Lithia Motors is shown in the chart below.
Because Lithia Motors is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 10.7% over the past three years and is estimated to grow 17.31% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Lithia Motors has a cash-to-debt ratio of 0.04, which is in the bottom 10% of the companies in Vehicles & Parts industry. The overall financial strength of Lithia Motors is 5 out of 10, which indicates that the financial strength of Lithia Motors is fair. This is the debt and cash of Lithia Motors over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Lithia Motors has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $14.7 billion and earnings of $23.07 a share. Its operating margin of 5.68% in the middle range of the companies in Vehicles & Parts industry. Overall, GuruFocus ranks Lithia Motors's profitability as strong. This is the revenue and net income of Lithia Motors over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Lithia Motors is 10.7%, which ranks better than 84% of the companies in Vehicles & Parts industry. The 3-year average EBITDA growth rate is 24%, which ranks better than 88% of the companies in Vehicles & Parts industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Lithia Motors's ROIC is 9.89 while its WACC came in at 9.13. The historical ROIC vs WACC comparison of Lithia Motors is shown below:
In conclusion, the stock of Lithia Motors (NYSE:LAD, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 88% of the companies in Vehicles & Parts industry. To learn more about Lithia Motors stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
