Why Lithia Motors May Be Worth Speculating On

Last week, Jim Cramer took a call from Steve in Connecticut, who asked for his thoughts on Lithia Motors. After doing some research, Cramer added the stock on Friday’s “Mad Money.”

From its headquarters in Medford, Ore., Lithia operates a chain of 84 car dealerships in 11 states, primarily located in the West and Midwest regions of the United States. With a $600 million market cap, Lithia is a small company, making it speculative in terms of size. Given the strong numbers the company has been reporting lately, Cramer thinks this stock is worth speculating on.

Of course, car dealerships were devastated during the Great Recession of 2008-2009, but Cramer noted that Lithia is really a retailer that just happens to sell new and used cars. As it turns out, auto sales are the largest retail sector in the U.S. It is a trillion dollar market with nearly 18,000 dealerships nationwide.

Cramer noted that Lithia is retailer that’s 100 percent domestic with lots of growth potential, as well as room to expand because the dealership business is very fragmented. In its first quarter, Lithia reported a 21 percent increase in same-store sales, beating its competition by far. At 8.4 percent, Lithia also reported the highest gross margin of any dealership operator. It also reported the fastest revenue growth, coming in at 30 percent.

“Based on the numbers, these guys are clearly the best at what they do,” Cramer said, adding that in addition to selling cars, it also profits from service and maintenance. The service part of its business accounts for just 11 percent of Lithia’s revenues, but makes up 32 percent of its company’s profits.

“So making the sale is just the beginning, as Lithia can keep making money off its customers for years and years by servicing their vehicles,” he continued. “That’s a nice, stable business.”

Of course, Lithia’s stock comes with a lot of risk, Cramer said. If the U.S. economy continues to worsen, as the latest jobs data suggests, then people are likely to buy fewer cars. If you think the economy will improve, however, then Cramer said Lithia is worth speculating on.

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