Lithia Expected to Come Down

Lithia Motors, Inc. (LAD) is a growing retailer in the highly fragmented automotive industry. The company is focused on improving productivity, which should propel earnings growth. Our major concerns are the general health of the overall industry, exposure to Ford (F), General Motors (GM) and SUVs as well as the volatile interest rates.

The company indicated guidance of a loss per share of $0.05 to $0.10 for the first quarter of 2008. For the full year 2008, the company expects earnings per share to be in the range of $1 to $1.30 per share. Revenues for 2008 are expected to be approximately $3.2 billion to $3.3 billion. Same-store sales are expected to decline 3% to 5%.

Gross margin is anticipated at 16.5% to 16.6% while operating margin is likely to remain at 2.4% to 2.7%. The management expects net margin of 0.7% to 0.9% in 2008. Currently, the company is trading at 7.6x our 2008 EPS estimate of $1.13. Lithia is trading at a discount to the peer group median multiple and industry median multiple. Thus, we rate the stock a Hold with a six-month target price is $9.50, which is 8.4x our 2008 EPS estimate.

Waiting on Exar Turnaround

Exar Corporation (EXAR) is primarily an OEM [original equipment manufacturer] of semiconductor ICs [integrated chips] and devices that are embedded within telecom and networking equipment. The firm has just completed a merger with Sipex, which will significantly reduce margins.

Strong design win activity and a solid pipeline indicate significant sales growth towards the end of the fiscal year and in fiscal 2009. However, execution remains an issue, since there are significant hurdles between securing a design win and generating revenue from it.

The shares are currently trading at a 32.4x multiple of price to our 2010 earnings estimate (P/E). The near-term visibility does not show promise, but longer-term growth prospects are looming. The recently acquired ON business continues to do well.

We view the softness at serial communications as temporary. Telecommunications service providers have raised capital spending budgets by roughly 5% -10% for calendar year 2008, which should trickle down to the semiconductor component and device providers such as EXAR.

Although the precise timing of a rebound in demand remains uncertain, the net cash per share of $6.45 limits downside risk. In the near-term, we expect shares to trade near or slightly higher than the current set of valuation metrics. We are reiterating our target price of $9, which reflects a P/E multiple of 36x.