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Penske Auto Is Thin But Has Some Quality Fund Support

Posted
10/12/2012 6:36:00 PM
By: Investor's Business Daily
Referenced Stocks:ISRG;PAG

Buying thinly traded stocks generally isn't a good idea.

The lack of liquidity makes it hard for big players to quickly unwind or build a significant position. Quality funds seldom buy such stocks.

Exceptions, however, happen.

Penske Automotive Group ( PAG ) trades about 300,000 shares daily. That figure might not be thin if Penske were a high-priced stock.Intuitive Surgical ( ISRG ), for example, trades less than 300,000 shares daily. However, with a per-share price near 500, Intuitive can't be called thin. With Penske's share price in the 30 neighborhood, it qualifies as thin.

Yet, at least one quality fund has been building a position. Through the third quarter, Fidelity Contrafund has added to its position in each of the past four quarters.

Penske owns and operates 171 franchised car dealerships in the U.S. and Puerto Rico, 170 internationally and 30 collision repair centers. The international dealerships are primarily in the U.K., but Penske also has dealerships in Germany and Italy.

About 38% of sales are from outside the United States. Penske doesn't hedge against currency fluctuations.

On Tuesday, Penske reported it acquired a BMW and Mini dealership in Ontario, Calif. The move will add $125 million in annual revenue.

The customer base is mostly upscale. About two-thirds of revenue are tied to premium brands, such as Porsche, Audi, BMW and Mercedes-Benz.

Penske grew earnings 53% in 2010 and 35% last year. Revenue expanded 9% and 11%.

The Street expects a 22% EPS pop this year on 13% revenue growth.

Q3 results will be reported Oct. 30 at 2 p.m. ET. Analysts expect earnings to advance 14% on a 10% sales gain.

Return on equity was 15% last year, up for a third year in a row. While that's below the 17% minimum ROE associated with elite stocks, Penske's ROE was 17.3% in Q1 and 16.6% in Q2.

Penske pays a quarterly dividend of 12 cents a share, which represents an annualized yield of 1.6%. In February 2009, the company suspended the dividend. The dividend was reinstated in mid-2011.