Investors Should Look Past Lithia Motor's Earnings Restatement

| About: Lithia Motors, (LAD)
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Lithia Motors (NYSE:LAD) announced yesterday they are restating 3Q06 earnings and will need to restate (higher) 2003, 2004, and 2005 results to eliminate the cash flow hedge accounting associated with its basic net income per share for the three and nine months ended September 30, 2006 are $0.54 and $1.63, as adjusted, $0.09 and $0.10 per share less than previously reported. Diluted net income per share for the same periods are $0.50 and $1.50, as adjusted, $0.10 and $0.09 per share less than previously reported. The details are very technical and it certainly will require adjustments to my earnings model. Having said that, the stock was up $0.09 on 137,000 shares (basically no reaction) to the news.

While this is going to be messy from a modeling standpoint, I don’t think this is a poor reflection on management. Don’t get me wrong, even though this is my top stock pick (Lithia is ranked #1 in the elite 5,) I do not hesitate to criticize management when I disagree with them. The company’s stand alone used vehicle concept (since the beginning of this year) is a great example of where I think shareholder dollars and more importantly resources (like management time and talent) could be better used on the company’s core operations. But from the little I understand about hedge accounting, it is very complicated. And the GAAP standards seem to be changing (retroactively.)

And I think Lithia is in good company. Take Ford Motor Company (NYSE:F) as an example. Say what you want about Ford Motor Company’s products and union issues, but I think most people on Wall Street and in the industry credit Ford as having some of the best minds in the area of finance around. And they groom and train finance professionals really well. This is why I am so encouraged with Group 1 and Sonic’s prospects, because they have recruited some of the top people out of Ford Finance and put them in leadership positions at their companies.

Yet, with all of that finance “brainpower,” as many of you saw, Ford similarly had to restate earnings (from 2001 to 2005) to correct accounting for certain derivative transactions. While I am a little more embarrassed that earlier this week Lithia forgot to include (in their proxy statement) their lead independent director’s name and therefore was in technical non-compliance with their NYSE listing, I do not think a large finance army (like what Ford has) could have helped Lithia avoid this restatement. And so I was encouraged to see investors look past this technical issue.