A Way to Leverage Automakers' Uptrend

10/15/2012 8:00 am EST

Focus: STOCKS

This stock is a direct play on the upswing in car and truck sales, but isn't bogged down by the underlying debt and manufacturing issues that carmakers contend with, observes Greg Pugh of Investing Daily.

The auto industry is back in the driver’s seat. According to a report last week from Autodata, US automobile and light truck sales rose 12.8% in September, compared with the same month a year ago.

Among US automakers, Chrysler posted the largest gain from 12 months earlier. With 142,041 vehicles sold, Chrysler’s sales rose 11.5% compared with September 2011. Sales at General Motors (GM) rose a relatively paltry 1.5% on 210,245 vehicles sold, while sales at Ford Motor (F) fell 0.2%.

During the past six months, General Motors stock has dropped 5%, and Ford 20%. Automaker stocks are great buy candidates now, if you think the auto industry will eventually see better days. However, there’s a better way to play rising new auto sales than just buying automaker stocks.

Auto dealer Lithia Motors (LAD) posted a rise in second-quarter 2012 earnings and raised its full-year earnings forecast, as higher demand for new cars spurred sales. Unlike most large US auto dealer groups, cars and trucks made by US automakers account for most of Lithia’s new-vehicle sales.

Earnings from continuing operations rose to $20.5 million, or 78 cents in earnings per share (EPS), for the second quarter, from $14.7 million, or 55 cents in EPS, a year earlier. Excluding items, Lithia earned 76 cents in EPS, an increase of 25% from the same quarter a year earlier.

Total revenue rose 26% to $847.1 million. Revenue from its new vehicle retail segment, which accounts for more than half of total revenue, rose 35% to $470.4 million.

Lithia, the ninth-largest US auto dealer, said it now expects between $2.69 and $2.75 in EPS for the full year 2012, from an earlier forecast of $2.45 to $2.53 in EPS. This is an increase of 9.8% on the new earnings outlook. Earnings are projected to increase 12% in 2013 to $3.07.

Lithia has a current dividend yield of 1.15%, and has increased its dividends by 43% in the past year. The company has a current payout ratio of 11.5%.

Lithia’s stock price is up 60% year to date and 113% in the past year. However, Lithia is trading at a price-to-earnings (P/E) ratio of 13, significantly below the industry’s P/E of 19.

We give Lithia Motors a buy recommendation, with an equity score of 1.7. Our 12-month price target is $40, a potential 14% increase from the current price.

Read more from Investing Daily here...

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