If Lithia Motors Is Any Indication, the Auto Industry Is Still Rolling Along

As new-vehicle sales peak in the U.S., inventories are swelling a little bit more than usual and incentive spending is picking up. Automotive investors are anxiously waiting to get any glimpse or forewarning of deteriorating industry health. Investors will have a much better idea of where the industry is headed once major automakers report later this week, along with America's largest dealership group, AutoNation. But if Lithia Motors, Inc. (NYSE: LAD) isany indication, the good times are still rolling.

Bottom-line beat and dividend hike

Don't tell Lithia Motors the automotive industry's good times are over: The company just posted a strong first quarter 2017. Revenue jumped 12.8% compared to a year ago,to $2.24 billion, which was in line with consensus estimates from Thomson Reuters. On the bottom line, Lithia Motors adjusted earnings rose to $1.78 per share, a healthy 14.8% gain over the prior-year figure.

Image source: Getty Images.

To better understand what was driving Lithia Motors'strong results, and to perhaps get a glimpse into the industry's health, let's break it down into segments.

Revenue from new-vehicle retail sales jumped 10.4% year over year to $1.21 billion, driven by two factors: increases in total volume and prices. New-vehicle retail sales volume jumped 8.8% to 35,616 units, while revenue per vehicle jumped 1.5% to $33,982 per vehicle.

Used-vehicle retail revenue increased 13%compared to the prior year,to $602.2 million, with used-vehicle volume up 12.2% to 30,783 units, and revenue per used retail vehicle up a slight 0.7% to $19,563. Revenue from service and parts increased 18.3% to $228.4 million, and Lithia's finance and insurance business generated nearly 22% more revenue, up to $84.5 million.

What's interesting, though, is that while new-vehicle sales represent about 54% of first-quarter revenue, it was the least profitable segment and generated only about 20% of gross profit. Conversely, service, body, and parts generated only 10% of revenue but accounted for 33% of total gross profit. Used-vehicle sales generated 30% of revenue, and only 21% of gross profit. Finance and insurance generated 6% of total revenue and 26% of gross profit.

What it means

Lithia's results emphasize a couple of different takeaways depending on what angle of the automotive industry you're looking at. For dealership groups, especially those with a diverse business model that includes finance, insurance, and service, the plateau of the U.S. new-vehicle market is less worrisome than it is for investors in major automakers. Look at the sustainability of Lithia's peer group compared to the slowing growth of the industry's seasonally adjusted annual rate of sales (SAAR).

Image source: Lithia Motors' April 19, 2017, Q1 presentation. PTI = pre-tax income.

From a different angle, one that resonates more with investors in major automakers, it's positive news that retail revenue per new vehicle and used vehicle continues to move higher. This gives the industry a little more wiggle room as incentives also increase, and impacts the bottom line that much less. There's still a large need for major automakers to balance inventories and incentives, so that trend doesn't change, but as long as retail demand remains healthy and plateaus rather than declines drastically, there's plenty of opportunity to generate record or near-record profits in the near term.

Ultimately, if Lithia is any indication, the industry is still healthy enough to support strong profits, but investors might consider having some exposure to dealership groups with proven service and financing business segments, as those are much more proven to support overall business amid a downturn.

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Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.