Overview
On June 15, 2014, Lithia (symbol: LAD) announced the acquisition of DCH Auto Group for $362.5M for $340M in cash and $22.5M in LAD stock. While Lithia has enjoyed a 23% rise in stock price as of June 30th, we believe there is considerably more upside to Lithia stockholders.
DCH brings Lithia scale and brand/geographic diversification. DCH’s 27 dealerships are all located in the two largest automotive markets in the US, NY/NJ (13 dealerships) and Southern California (14 dealerships). The mix of dealerships includes:
- Luxury: 2 BMW, 2 Lexus, and 2 Audi
- Import: 7 Toyota, 11 Honda/Acura, 1 Nissan, and 1 Kia
- Domestic: 1 Chrysler Jeep Dodge Ram
Our Perspective
Lithia expects the DCH acquisition to add $0.65-$0.75 to EPS, annualized. With 23.5M LAD shares outstanding, $0.70 EPS implies the DCH dealerships are profiting $16.5M annually or $611k per dealership.
According to the National Automotive Dealership Association (NADA), in 2013 the average dealership’s ‘Net Profit before Taxes’ was $923,248. At a 30% tax rate, the average dealership’s after-tax Net Profit is approximately $646k. Therefore, despite an attractive brand mix and large stores in major metros, DCH trails the average store profitability, suggesting significant profit improvement opportunity.
With the acquisition, LDA announced DCH would add approximately $2.3B revenue, or $85.2M per dealership. This places the average DCH dealership over twice as large as the national average. With only $611k in net profit per store, DCH’s margins are less than half the industry average and significantly below not only LAD, but also AutoNation which has a more similar brand and geographic footprint.
| Group | Revenue ($) | Net Profit ($) | Net Profit : Revenue |
| Lithia | 4.0B | 106M | 2.65% |
| AutoNation | 17.5B | 375M | 2.14% |
| Top 4 Public Retailers | 50.0B | 815M | 1.63% |
| NADA average | 41.3M | 646k | 1.56% |
| DCH | 2.3B | 16.5M | 0.72% |
Implications for LDA
LDA announced the DCH acquisition would add $0.65-$0.75 EPS annually. We believe these numbers reflect current, DCH margins, not the potential LAD is likely to drive from these same assets. If DCH can improve operations and margins to reach peer benchmarks, there is EPS gains from the deal could be $1.50-$2.60.
|
DCH margin improvement |
DCH addition to EPS |
LDA EPS |
EPS % Increase |
|
| LDA | 369% | $2.58 | $6.70 | 63% |
| AutoNation | 298% | $2.09 | $6.21 | 51% |
| Top 4 | 227% | $1.59 | $5.71 | 39% |
| NADA average | 218% | $1.53 | $5.65 | 37% |
LDA Share Price
LDA stock close on June 13, 2014 (Friday before announcement) was $76.68. The stock closed on June 16, 2014 (Monday after announcement) at $86.53 or 13% higher than prior the announcement. This 13% increase is close to the announced increase in EPS. LDA EPS was $4.12 and DCH would add $0.70 EPS or a 17% additional EPS.
Since then, investors appear to be recognizing the potential upside for LDA. The stock closed June 30, 2014 at $94.07 or a 23% increase since prior to deal announcement.
Given the potential opportunities described above, there should still be upside in LDA stock of 37-63% from before the announcement or $105-125 per share. In terms of driving profitability, LDA performs best in class and has a history of successfully integrating acquisitions, rapidly bringing operations to LAD standards. While this acquisition is larger and brings new challenges related to new geographies, we have confidence in LAD management to drive performance improvement over time.
Other considerations
There are other operational synergies and cost savings that should come from the increased scale and scope that should improve the performance of LAD’s existing operation that are not included in this analysis, representing further potential gains. Access to additional trade-ins to fuel used vehicle performance
- Access to additional trade-ins to fuel used vehicle performance
- Negotiate better terms with financial institutions and F&I product providers
- Improve scale in purchasing, technology and back office operations