LAD

We rate LITHIA MOTORS INC (LAD) as a Reduce with a composite score of 43.1/100 at a current price of $283.37. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in stability (67th percentile) and value (61th percentile), which together account for the majority of the composite score. Offsetting weakness in quality (35th percentile) and investment (38th percentile) tempers our overall conviction. We assign a No Moat rating (33/100), High uncertainty, and Poor capital allocation.

Key items to watch: momentum to confirm whether the current price trend has legs; balance sheet deleveraging progress. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

LITHIA MOTORS INC holds a top-quartile position (#0 of 50) within the Retail Trade sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 43.1/100 places it at rank #3109 in our full 7,333-stock universe. At $8.1B in market capitalization, LITHIA MOTORS INC is a mid-cap player in the Retail Trade space, which limits certain scale advantages but may allow for more agile strategic execution.

Revenue is growing at 5%, though momentum at the 40th percentile suggests the market has not yet fully recognized this trajectory. This potential disconnect between fundamental improvement and market recognition could represent an opportunity for patient investors if the growth trend persists.

The margin cascade tells an important story: gross margins of 15% (-20.8pp vs sector) narrow to operating margins of 4% (+0.5pp vs sector) and net margins of 2.4%, yielding a gross-to-net conversion rate of 16%. This conversion rate is typical for the sector, suggesting a standard cost structure without notable efficiency advantages or disadvantages.

At a current price of $283.37, LITHIA MOTORS INC is trading near fair value based on current fundamentals. Our value factor score of 61/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. Valuation metrics are mixed, with no strong signal of mispricing in either direction.

The stock currently trades at a P/E of 7.8x (a 64% discount to the sector median of 21.4x), EV/EBITDA of 3.7x (discounted to peers), P/B of 1.1x, P/S of 0.2x. The below-sector P/E suggests possible undervaluation or the market pricing in near-term headwinds.

We assign a High uncertainty rating to LITHIA MOTORS INC. Key risk factors include significant leverage (261% debt-to-equity), the combination of leverage (261% D/E) and thin margins (2.4% net) amplifies downside risk. The wide range of potential outcomes widens our fair value estimate and increases the possibility of permanent capital impairment. Investors considering this name should size positions accordingly and demand a meaningful margin of safety before initiating.

Specific risk factors that inform our assessment include: significant leverage (261% debt-to-equity); the combination of leverage (261% D/E) and thin margins (2.4% net) amplifies downside risk. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 67th percentile and quality factor at the 35th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: above-average stability (67th percentile) suggests predictable business dynamics. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile warrants caution and disciplined position management.

We rate LITHIA MOTORS INC's capital allocation as Poor. Key concerns include elevated leverage (261% D/E). Exemplary capital allocators generate ROE above 20% and maintain conservative leverage — LITHIA MOTORS INC significantly underperforms these benchmarks, raising questions about management's ability to create shareholder value.

Investors should scrutinize management's reinvestment decisions and balance sheet trajectory before committing capital. Poor capital allocation often compounds over time: overlevered balance sheets limit strategic flexibility, while low returns on capital destroy shareholder value. We would need to see sustained improvement in profitability metrics and balance sheet discipline before considering an upgrade.

In summary, LITHIA MOTORS INC receives a Reduce rating with a composite score of 43.1/100 (rank #3109 of 7,333). Our quantitative framework assigns a No Moat (33/100, trend: stable), High uncertainty, and Poor capital allocation. The average factor score across quality, value, momentum, stability, and investment is 48/100.

Our analysis does not support a constructive view on LITHIA MOTORS INC at this time. The combination of limited competitive advantages, high uncertainty, and poor capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.