Lithia Motors reported all-time record results of $1.13 per share for adjusted diluted earnings per share from continuing operations. This mark beat consensus by $0.03, and another healthy mid-digit percentage increase in same-store revenue year over year also enabled the company to beat on revenue. Despite what we see as a very strong quarter, management’s comments on more growth coming from acquisitions and the introduction of 2014 full-year EPS guidance of $4.15-$4.25 (well below consensus of $4.45) means we will be reducing our fair value estimate by 10%-15% but keeping our moat rating in place.

During the call, management spoke about accelerating M&A since the environment is ripe for deals and noted that more growth would come from increasing share rather than organic growth. We think these comments indicate that Lithia will take share via acquisitions and thus may be willing to pay a higher multiple than in the past to fuel growth. Although we do not expect management to overpay, we will be increasing the assumed price to sales multiple that Lithia pays for acquisitions over the next five years, which will lower our fair value estimate.

Despite our fair value estimate plans, we think Lithia is an outstanding operator and has an excellent growth runway ahead. The company’s SG&A leverage continues to perform at the top of the sector with SG&A as a percentage of gross profit in the quarter down 120 basis points to 65.6%. Furthermore, many stores still are not performing at this level, which suggests more room for improvement.

We also think its focus on small cities yields efficient scale and is a very difficult moat source to compete with. The other dealers in our coverage space do not even compete in Lithia’s geographic niche. The balance sheet remains strong, with no mortgage debt due until 2016, and total liquidity is $301 million. This amount includes $165 million of available credit lines, so we do not see liquidity hindering Lithia’s growth ambitions.