Penske Automotive Group: My Value Stock of the Week

Penske Automotive Group, Inc. (PAG) operates in 22 U.S. states and overseas. It has 143 U.S. light-vehicle franchises, including in Puerto Rico, and 161 franchises overseas, primarily in the United Kingdom. The company is the second-largest U.S.-based dealership in terms of light-vehicle revenue and sells more than 35 brands, with 93% of retail automotive revenue coming from luxury and import names.

In addition to new and used vehicles, other services are parts and repair and finance, and insurance. PAG also owns 22 CarShop used-vehicle stores in the U.S. and U.K. Its Premier Truck Group owns 35 truck dealerships selling mostly Freightliner and Western Star brands.

In fact, the company has become the largest dealership group for Freightliner in North America after the acquisition of Warner Truck Centers. The purchase helped the company diversify its business, expand its customer base, and capitalize on the Retail Commercial Trucks segment.

The acquisition of Kansas City Freightliner, completed during the second quarter this year, is expected to add $450 million to PAG's annualized revenue. Plus, last month, the company acquired the remaining 51% of its Japanese-based joint venture of premium luxury automotive brands. This should add $250 million in annual revenues. 

PAG also has $300 million in annualized revenue from deals in its pipeline. These are expected to close by the end of the year or early next year. Its Penske Transportation Solutions joint venture has also been aiding growth. The venture generated $2.9 billion in revenue in the last quarter. In addition, its acquisition of Black Horse Carriers earlier this year should add $600 million to the joint venture this year.

Due to the used-car bubble, PAG is expanding its used-vehicle operations. For instance, its U.S.-based supercenters are now called CarShop. The company is on track to increase its CarShop footprint from 22 locations to 40 by the end of 2023. This should generate more than $150,000 in unit sales and around $2.5 billion in total revenue.

The expansion of its digital capabilities also bodes well. The digital tools that are available on www.carshop.com are helping to provide a comprehensive online shopping experience for customers. PAG also reported a strong third quarter. In fact, it was its best ever with diluted EPS from continuing operations of $4.46, beating the consensus estimate and soaring 45.3% year over year.

PAG is seeing exceptional demand for truck leasing as many fleets cannot buy as many new trucks as they would like due to supply chain shortages. Plus, the company's truck stores have been enjoying pricing power due to low inventory.

The good times are expected to continue as auto dealerships are stable and profitable, with earnings coming through several segments, including parts, service, and used cards. Plus, parts and service revenue should continue to be highly lucrative as many manufacturers require warranty work to be done at the dealership.

PAG has an overall grade of A, translating into a Strong Buy rating in our POWR Ratings system. The company has a Growth Grade of B, which makes sense as analysts expect sales to rise 24.3% for the year, while earnings are forecasted to increase 117.1% over the same period. Even with all that growth, PAG also has a Value Grade of A.

This isn't surprising, with a trailing P/E of 8.2 and a forward P/E of 8.47. We also provide Momentum, Stability, Sentiment, and Quality grades for PAG, which you can find here. PAG is ranked #3 in the B-rated Auto Dealers & Rentals industry. For more top stocks in this highly rated industry, click here.

Speaking of the Auto Dealers & Rentals industry, PAG is undoubtedly a great pick compared to some of its peers. For instance, Copart, Inc (CPRT), one of the industry's larger companies, only has an overall grade of C and a Neutral rating in our POWR Ratings system. The company also has a Growth Grade of C and a Value Grade of F, which doesn't instill much confidence.

CarMax, Inc (KMX) is another well-known player in the industry, and its overall grade of D is even worse than CPRT. That grade equates to a Sell rating in our POWR Ratings system. In terms of its component grades, its Growth Grade of D and Value Grade of C doesn't bode well for its near-term performance.

PAG is just one of the stocks in my POWR Value portfolio. That's where I combine my many years of investing experience with the Top 10 Value Stocks strategy, which has +38.63% annual returns, to bring investors the best value stocks for today's market. 

If you would like to see the current portfolio of 14 stocks and be alerted to our next timely trades, then consider starting a 30-day trial by clicking the link below.

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PAG shares were trading at $111.92 per share on Friday afternoon, up $1.29 (+1.17%). Year-to-date, PAG has gained 91.64%, versus a 26.51% rise in the benchmark S&P 500 index during the same period.

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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