Lithia's per-share profit jumps 54% on paper gain; core profit slips 5%

Lithia, based in Medford, Oregon, sells new and used cars, arranges car loans and insurance, and repairs cars. Most of its revenue comes from the United States, with the rest from Canada and the United Kingdom.¹ At June 30 it ran 467 locations selling 59 brands. Its 2025 revenue was a record $37.63 billion.² The United Kingdom made up 20.5% of third-quarter revenue.³

Service and parts work, which the company calls aftersales, is its biggest source of gross profit, at 43.1% in the quarter.¹ New cars earn thin margins. Lithia's new-car gross margin was 5.7%, down from 6.1% a year earlier.² Its own lender, Driveway Finance, made a record $937 million of loans in the quarter, with an 18.3% penetration rate, up from 17.5% in the second quarter.³

The 10-Q blames lower new-car profit on the "continued normalization of margins." Carmakers must approve dealership purchases, and some have refused Lithia in the past.¹ The annual report also warns that carmakers from China and India are entering the United States.² On March 11, 2026 the Federal Trade Commission sent Lithia a letter warning that it may be advertising car prices lower than what it charges. The letter reached no conclusion, and similar letters went to other dealers.³ Elsewhere in the industry, a $212.00-a-share cash buyout of rival Penske Automotive by its largest holders has been proposed.⁴

This year's reported earnings have swung with Lithia's 31.95% voting stake in Pinewood Technologies, a London-listed maker of dealer software.¹ The 10-Q put the stake's fair value at $177.2 million at the end of 2025 and $129.5 million at June 30. Lithia strips the gains and losses on it out of its adjusted results.² In the first quarter an unrealized Pinewood loss pulled results down. In the second quarter a $28.2 million investment gain lifted them.³

Buybacks are the other theme of the year. The board added $500 million of buyback room in May, and the dividend for the second quarter rose to $0.70.¹ Fidelity's parent, FMR, reported owning 9.6% of the stock at June 30 as a passive holder. A Vanguard adviser reported 4.90%, under the 5% reporting line.² Director Heidi O'Neill left the board on September 25, 2026, for personal reasons and with no disagreement.³

Revenue rose 3% to $9.9 billion in the third quarter. Gross profit rose 2.0% to $1,495.8 million.¹ Overhead costs (selling, general and administrative) rose faster, 3.8%, to $1,036.3 million. So operating income was flat at $420.2 million, against $421.6 million a year earlier.² Interest on floor plan loans, the credit lines dealers use to hold cars on the lot, rose 21.6% to $70.3 million.³

The jump in reported profit came from below the operating line. Other income was $104.2 million, against a $13.3 million expense a year earlier, and the company's own reconciliation removes an $88.8 million investment gain from it.¹ The release ties that gain to the Pinewood stake and calls it unrealized, so no cash came in.² After tax the gain was $65.1 million, or $2.95 of the $13.22 a share, about 22%. The year-ago quarter carried a $22.7 million investment loss, which made the comparison easier.³ The tax rate rose to 25.1% from 22.5%. Reported net income rose 34.0% to $292.9 million, from $218.6 million.⁴

Adjusted results remove these paper swings and other one-off items. On that basis net income fell 5% to $229.3 million, from $240.9 million.¹ Yet adjusted earnings per share rose 9% to $10.34, from $9.50. The reason is buybacks: the average diluted share count fell 12.7% to 22.0 million, from 25.2 million.² Chief executive Bryan DeBoer credited the lower share count with "magnifying every dollar we earn."³

The picture since January is weaker. Through September, reported net income fell 4.6% to $656.6 million, and adjusted net income fell about 9% to $630.5 million, from $692.6 million.¹ Adjusted earnings per share through September still rose 4%, to $27.61.²

Counting only stores it ran in both years, Lithia sold less. Same-store revenue fell 1.4% and same-store gross profit fell 1.6%.¹ Same-store new-car gross profit fell 8.5%, finance and insurance revenue fell 8.1%, and used retail units fell 3.2%. Across all stores, profit per new car fell 5.7% to $2,635.²

Some lines did better. Used-car gross profit per car rose $197, or 11%, and same-store service and parts gross profit rose 2.4%, at a 59.5% margin.¹ The lending arm earned $32.3 million, up 69%, and set aside $22.5 million for bad loans, down from $25.8 million.² The company's adjusted earnings before interest, taxes, depreciation and amortization rose 1.3% to $443.5 million.³

Lithia keeps trading stores. Between July and September it bought two stores expected to bring $150 million a year in revenue, and sold two that brought $115 million a year.¹ In October it bought two Hyundai and two Kia stores in Memphis, adding $250 million of expected yearly revenue. Stores bought so far this year carry $1.17 billion of expected yearly revenue.²

Cash flow is where the buybacks show. From January through September, reported operating cash flow was negative $204.9 million, against positive $233.0 million a year earlier.¹ Building inventory used $555.0 million, and capital spending was $252.3 million. That left a reported free cash outflow of $457.2 million.²

The company prefers an adjusted operating cash flow, $2,125.2 million through September, which adds in the change in floor plan debt not owed to carmakers.¹ But $1,138.3 million of that came from turning inventory-backed revolving loans into floor plan loans, which moves debt between labels rather than earning cash.² Without that shift, adjusted operating cash flow was $986.9 million, or $734.6 million after capital spending.³

Against that, from January through September Lithia spent $624.5 million on buybacks, $41.1 million on dividends and $264.8 million on acquisitions, $930.4 million in all.¹ That is $195.8 million more than the $734.6 million of underlying free cash flow worked out above, and on Lithia's own measure net debt rose $521.3 million over the 12 months to September 30, to $4,992.2 million.² Net debt did fall in the third quarter itself, to $4,992.2 million at September 30 from $5,143.6 million at June 30.³ The full year 2025 looked similar on a reported basis: operating cash flow of $356.7 million less $350.9 million of capital spending left $5.8 million, against $55.3 million of dividends. On the company's adjusted measure, 2025 operating cash flow was $1,291.3 million.⁴

Total debt was $16,256.3 million at September 30. Much of it funds cars on the lot and the loan book: floor plan loans alone were $6,566.8 million.¹ Lithia's own net debt figure leaves out inventory debt and the lending arm's debt, as its 10-Q table shows.² On that measure, net debt was 3.07 times the last 12 months of adjusted operating earnings, up from 2.63 times. Those earnings fell 4.4% to $1,627.2 million while net debt rose.³

Operating income covered the quarter's $133.4 million of floor plan and other interest about 3.1 times.¹ Unrestricted cash fell to $108.1 million, from $206.5 million. Liquidity, counting securities and unused credit lines, was about $1.4 billion.² The nearest bond is $400 million of 4.625% notes due in 2027. The main US Bank credit line is secured by a large share of Lithia's assets and runs to February 27, 2031.³ Its loans carry tests on the current ratio, fixed charge coverage and leverage, but the filings call them customary and print no limits. Management says it has enough funding for the next 12 months.⁴

Lithia had 21,983,116 shares outstanding on July 29, worth $6.59 billion at the October 20 close and $5.92 billion at the October 21 close.¹ Lenders on the main credit line hold security over much of the company, and the board can issue preferred stock without a shareholder vote.² In the quarter Lithia bought about 246,000 shares at an average of $345, about $85 million. That price is about 28% above the October 21 close.³ About $535 million of buyback room remains, roughly 9% of the current market value. The 10-Q says buybacks may be a better use of money than acquisitions.⁴

The dividend has climbed from $0.55 a share for the fourth quarter of 2025 to $0.70 for the second quarter and $0.75 now, a rise of 36%.¹ At $3.00 a year it yields about 1.1% at the October 21 close.² Bryan DeBoer, the chief executive, also became chairman on October 19, 2026. Sidney DeBoer becomes vice chairman, and Louis Miramontes stays lead independent director.³ Most of Lithia's franchise agreements name Bryan DeBoer as the person who controls the stores, so the company leans heavily on him.⁴

Lithia's stated goals are about how it spends cash. It aims to put 25% to 35% of free cash flow into acquisitions and 40% to 50% into shareholder returns, and it targets an after-tax return above 15% on stores it buys.¹ The company's target counts capital spending as one of the uses, so the fair base is the $986.9 million of operating cash flow before capital spending; this year's $665.6 million of buybacks and dividends is about 67% of it, above the 40% to 50% range.² Announcing the board change, the company said its "strategy and priorities are unchanged."³

The market did not buy the headline. Lithia fell 10.1% from $299.61 on October 20 to $269.235 at the October 21 close, while the S&P 500 fund rose 0.5%.¹ Rivals fell too: AutoNation dropped about 5.5% to $153.07 near the close, and Asbury dropped about 4.7% to $163.97. So part of the move hit the whole group, but Lithia fell more.² The stock had closed at $345.715 on September 15. At $269.235 it trades near 7.8 times the last four quarters of adjusted earnings per share.³

The bull case is that the core business is holding up better than the drop suggests. Used-car profit, service profit and the lending arm all grew, and adjusted operating earnings rose 1.3%.¹ Each share bought back raises every holder's slice, and the stock now sits well below the $345 Lithia paid in the quarter.² At about 7.8 times trailing adjusted earnings, with a dividend up 36% since the end of 2025, a holder is paid to wait.³

The bear case, strongest point first. The business is earning less: adjusted net income fell 5% in the quarter and about 9% through September, and same-store gross profit shrank.¹ Buybacks are being paid for with debt: reported free cash flow was negative, net debt rose $521.3 million in a year, and leverage climbed to 3.07 times from 2.63 times, even after easing from 3.17 times at June 30.² Floor plan interest rose 21.6% and overhead grew faster than gross profit. The Pinewood gain can reverse, as the first quarter showed, and federal regulators are watching how dealers advertise prices.³

Holders of record on November 6, 2026 get the $0.75 dividend on November 20, 2026. The bigger test is fourth-quarter results; last year's report came on February 11.¹ We would be wrong if same-store gross profit turns back up, leverage falls back under 3 times, or Lithia sells Pinewood shares and turns the paper gain into cash. Getting back to the pre-report close of $299.61 would take a gain of about 11% from $269.235.²

Lithia held its earnings call at 10:00 a.m. Eastern time on October 21. What management said there about fourth-quarter trends, buybacks and debt is not in the material we hold.

The release does not give the stake's value at September 30, and no filing says whether Lithia plans to sell any Pinewood shares. Until it sells, the gain stays on paper.

The credit agreements test leverage and fixed charge coverage, but the filings print no limits, so the room left under them is unknown.

No filing gives a target range for net debt against earnings, so a reader cannot tell whether 3.07 times is above the company's comfort level.

The balance sheet shows $374.0 million of cash, restricted cash and equivalents at September 30, but the cash flow statement ends at $424.0 million. The release does not explain the difference.

The $400 million of notes due in 2027 are the nearest bond maturity, and no filing says whether Lithia will repay them from cash, its credit lines or a new bond, or at what rate.

Lithia gives goals for how it spends cash but no profit forecast for the fourth quarter or for 2027.