Lithia Motors Inc share price slumps, cuts Q3 profit forecast

Lithia Motors Inc reported on Monday that Q3 earnings are expected to be below the previous forecast, but still higher compared to last year, and also tuned down its Q4 and full-year estimates.

The U.S. car retailer said that it would not hit its Q3 target and has adjusted its net income from continuing operations in a range of $34.0 to $34.8 million, or $1.30 to $1.32 per share, more than a $4 million increase compared to last year. Albeit this will be the highest third-quarter EPS in the companys history, it would trail previous forecasts for $1.36-$1.38 per share.

This would be the first time in nearly five years the company misses its forecast. In its preliminary earnings report the company said that “modestly higher” selling costs and lower used car margins hurt profitability.

“Used car sales growth and margins were clearly a point of concern,” Morgan Stanleys auto analyst, Ravi Shanker, said in a note to investors. He also reminded that the only way to sell off growing inventories of used vehicles is to decrease prices.

Lithia reported used car retail same-store sales jumped 13% in the third quarter, outperforming the 11% rise in new vehicle same-store sales. The company, however, decreased its Q4 earnings forecast to between $1.17 and $1.19 a share, compared with its July prediction of between $1.23 and $1.26 a share.

RBC Capital Markets analysts wrote in a note: “The results at Lithia clearly point to a change in the used vehicle pricing market that may add some incremental pressure to the used vehicle gross profit performance across the auto sector.”

Falling pre-owned car prices is a problem concerning car retailers all over the U.S. As the new-auto retailers are recovering and sales are scoring new highs, the used-car market is drowning in supply, leading to a drop in prices. The National Automobile Dealers Association estimated a nearly 7% drop in average prices this year.

According to Manheim Inc., an automobile auction company, wholesale second-hand car prices fell 0.3% in September, marking a fifth consecutive monthly decrease.

Lithia Motors Inc fell 20.84% and closed at $64.01 on Monday in New York, marking a one year change of -9.64%. The company is valued at $1.67 billion. According to the Financial Times, the 10 analysts offering 12 month price targets for Lithia Motors Inc have a median target of $105.00, with a high estimate of $116.00 and a low estimate of $80.00. The median estimate represents a 64.04% increase from the last price of $64.01.