Lithia Motors reports big jump in earnings

On the heels of its biggest revenue year and best fourth quarter ever, Lithia Motors is in the hunt for new territory.

The Medford auto retailer reported a 52 percent bump in fourth-quarter earnings from continuing operations of $19.3 million, or 74 cents per share, up from $12.7 million, or 48 cents per share, a year earlier.

Revenue increased 26 percent to $877.4 million from $695.4 million in the fourth quarter of 2011.

The nation's ninth-largest auto retailer had $3.3 billion in revenue last year, which topped 2011's $2.6 billion by 26 percent and surpassed the all-time mark of $3.2 billion set in 2007.

"We thought there would be a little flurry (of deals) at the end of last year," said Chief Executive Officer Bryan DeBoer. "It never happened. Even though prices adjusted upwards, we thought there would be a frenzy to some extent."

Instead, mergers and acquisitions were pushed into 2013.

"After the start of the year, we've probably seen the most active acquisition environment we've seen since we've been public," said DeBoer, whose company went public in 1997. "The asking prices are definitely at a higher level, but they're not ridiculous."

The National Auto Dealers Association convention in Orlando, Fla., earlier this month signaled a rising tide of new opportunities.

"The Eastern markets are seeing strong activity with brokers," DeBoer said. "During the NADA, we spent time with brokers and dealers we weren't familiar with in the past."

He hinted strongly during a Tuesday conference call that Lithia may cross the Mississippi River in the next six months. The majority of the U.S. population lives east of the Mississippi, and distances between population centers often are much shorter than in Western states.

Lithia crossed the geographical divide once before, but relinquished a Wisconsin holding during its 2008 sell-off.

"It's fertile ground for us," DeBoer said. "We've never spent a great amount of time there."

The auto industry has carved up the East into 170 markets, with 90 in the West. Lithia has learned through experience that major metro areas aren't necessarily a great match.

"We're looking at the small- to medium-size markets within the mainstream franchises," DeBoer said. "We're probably not going into Miami, New York City, Boston, Philadelphia or Chicago. We like the regional hubs where there aren't similar franchises within 40 or 50 miles."

The exceptions are luxury-brand franchises, such as Mercedes-Benz and BMW, which the company operates in Portland and Seattle.

Part of what makes Eastern markets attractive is that the economy has shown more resilience.

"Most automotive analysts believe a multiyear recovery in auto sales remains ahead of us, and many of the Western markets we do business in are still significantly below peak registration levels experienced in 2005 and 2006," DeBoer said. "The East wasn't hit as hard as a lot of the West."

Ultimately, decisions will be made as to how potential locations fit into Lithia's matrix.

"We expect to recapture our investment within five years at a typical store," he said. "The West is by no means saturated. We're only in a third of the markets we want to be in, so we may see growth in the West before the East."

Last year, Lithia's total same-store revenues grew 23 percent, following a 22 percent increase in 2011 and an 18 percent gain in 2010.

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