LAD - Lithia Motors is downgraded to Equal Weight at Wells Fargo on margin worries

Wells Fargo cut its rating on Lithia Motors ( NYSE: LAD ) to Equal Weight from Overweight on its view that the risk-reward profile on the auto supplier stock is now balanced.

Analyst Colin Langan and team anticipate Lithia's gross margin rates will begin to fall from current record highs back to closer to long-term averages. The firm has the broad sector view that pricing will fall as auto production supply chain issues ease.

"Our revised EPS estimate for 2023 is 16% below consensus. Nonetheless, LAD is already trading at ~6.5x consensus 2023 EPS, which reflects investor expectations that the company's current margins are unsustainable."

On valuation, LAD is noted to be trading at nearly half its historical price-to-earnings multiple, which is seen reflecting market expectations that the company's current margin profile is not sustainable.

Shares of Lithia Motors ( LAD ) fell 1.05% in premarket trading on Friday.

The Seeking Alpha Quant Rating on Lithia is also flashing Hold.

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