Penske Automotive Group - Momentum


Penske Automotive Group ( PAG )

Diversity and a strong brand are two integral cogs in the success machine.  Penske has both.  What you might not know is that Penske is the second largest public traded auto retailer in the US by revenues.  They operate about 166 franchises in the US, about 170 overseas and their automotive division is seeing favorable trends.

I knew them as a truck rental company, but there is much more to this transportation services business than you might think.  Penske Automotive reported their most profitable year in company history and offered some bullish commentary going into fiscal 2012 which might just help propel the stock higher…

Company Description
Penske is a diversified transportation services group that encompasses retail automotive sales and services, truck leasing, supply chain logistics management, transportation components manufacturing, and high-performance racing.  In their auto division alone, they handle 40 different brands from Bugatti, Ferrari and Maserati to BMW and Acura with over 25,000 cars in inventory.

They also offer service plans on the vehicles they sell, which helps add to their revenue and keep their customers happy.

At their last report, the automotive group alone saw an 11% quarterly jump in revenue with same-store retail revenue up 6%, which equated to a 24% rise in EPS to 47 cents a share. 

Perhaps consumers are actually getting healthier…

I believe that government and third-party reports and surveys on consumer health should be supported by trends in the earnings of real consumer companies like Penske. Based on their results, it's hard to argue that consumers are indeed spending in some areas. 

In their other divisions, Penske offers trucking and logistical management solutions to all types of consumers and enterprises.  For example, a business owner can buy a fleet of trucks from Penske and have them provide all the maintenance and management of the fleet, removing a major burden from the business owner.  With in-house financing solutions, they have flexibility when working with customers in a tough economic environment. 

They also own and operate 'Davco,' which provides fuel processing and fluid level management as well as 'Truck-lite,' a company that provides visibility systems for truckers around the world.  Of course they still have their racing team, which is one of the most successful in history with over 330 major race wins in different classes and which provide innovation, support and advertizing for the company.

Financial Profile

PAG is a small-cap (2.17 billion) company that is trading at about 12 times forward (expectations for next quarter) earnings. This low valuation coupled with their strong growth could be a force that moves the stock higher.  

PAG became a Zacks Rank #1 Strong Buy on February 18th after their strong results.

The automotive company as a whole reported a quarterly sales increase of 0.27% at their last earnings report and saw a 6% drop in EPS for the same period.  Annual sales were up 7% compared to the prior year, with total sales of roughly 11.6 billion in FY2011.  Penske earnings jumped from a $1.18 in FY2010 to $1.91 in FY2011.  PAG is expected to earn $1.95 in FY2012 according to the Zacks Consensus Estimate. 

In 2011, Penske acquired 2,449,768 shares of its common stock at an average price of $18.07 per share ($44.3 million).  The Company currently has remaining authorization from its Board of Directors to repurchase up to $106.8 million of its outstanding common stock.  This action can be viewed as confidence in their future performance. 

Earnings Estimates
Penske posted higher-than-expected earnings last quarter.  They said they continue to see improvement in the automotive industry since the 2008-09 crisis. 

They saw average gross profit per new vehicle rise 8.4% and average vehicle prices also move higher by 4.4% to $38,800.  It's important to note that 70% of Penske's auto sales are premium vehicles. 

Expectations are for PAG to generate $0.46 in income this quarter.  Of the 12 analysts who cover PAG, the consensus is for the company to grow earnings by 8.4% in the current year (FY2012) and roughly 13% in FY2013. 

In terms of the magnitude of analyst estimate trends, we are seeing short-term (current and next quarter) consensus estimates lower than they were 60 days ago and higher for the current and next year.

Penske has managed to beat consensus estimates for the past four quarters at an average of about 2%.

Market Performance & Technicals
Penske tends to be closely correlated and more volatile when compared to the broad market, with a Beta of 2.10. 

Like most quality stocks in the S&P 500, Penske has been building a great deal of momentum over the past two months.  If you go back to the end of 2010, this was a $13.00 stock, so it has come quite a ways.

Even before the last earnings reports, PAG broke out above both the 50- and 200-day moving averages and has continued to rise in the past couple weeks.  The report initially sent shares lower, but they have since stabilized.  PAG is now firmly above its 50- and 200-day moving averages of $21.38 and $20.20, respectively.  The recent consolidation has developed some support at the $23.25 level, but I would look more to the $22 line for real support in a selloff.

PAG has exceeded the S&P 500's performance by over 12% in the past year and over 11% just in the past 3 months.  With the recent run-up into their report, they managed to return 5% more than the broad market over the past four weeks.  Penske is another consumer-driven story.  If data remains favorable, PAG should have some serious upside.  On the pullbacks, you may experience some uncomfortable acceleration in this high Beta stock. 

Jared A Levy is the Momentum Stock Strategist for He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: PAG

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