Penske Automotive Group (NYSE: PAG)
QVI Research Report | Updated Coverage | January 2023
Summary
Penske Automotive Group, Inc., a diversified transportation services company, operates automotive and commercial truck dealerships worldwide.
Roger Penske’s fabulously-run enduring enterprise is a favorite among customers and employees. Moreover, its highly competitive value proposition stands out in the crowded automotive marketplace.
The stock has significantly outperformed the total returns of its sector and the broader market since being added to the QVI Expanded Portfolio in February 2019.
Despite the inflationary bear market, fundamentals remain strong, and shareholder yields and valuation multiples suggest a continued discounted stock price.
Nevertheless, near-sighted traders have sold 20% of the float short in anticipation of a 2023 recession.
Editor’s Note: Remember to access the Quality Value Investing Glossary of Investing Terms and Metric Targets when referencing this research report. Unless noted, all data presented is sourced from Seeking Alpha as of the market close on January 11, 2023, and intended for illustration only.
Penske Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Penske Automotive Group, Inc. (NYSE:PAG) is a dividend-paying mid-cap stock in the automotive retail industry of the consumer discretionary sector. PAG was added to the QVI Expanded Portfolio on February 13, 2019, with a buy rating at a split and dividend-adjusted $39.83 a share.
Penske Automotive Group, Inc., a diversified transportation services company, operates automotive and commercial truck dealerships worldwide. The company operates through four segments: Retail Automotive, Retail Commercial Truck, Other, and Non-Automotive Investments. The company operates 320 retail automotive franchises, including 146 franchises located in the United States and 174 franchises located outside of the United States; 23 CarShop used vehicle dealerships in the United States and the United Kingdom; and 37 commercial truck dealerships in the United States and Canada. Penske Automotive Group was incorporated in 1990 and is headquartered in Bloomfield Hills, Michigan, USA.
QVI’s value proposition elevator pitch for Penske Automotive Group:
Roger Penske's fabulously-run enduring enterprise is a favorite among customers and employees, if underfollowed by investors. Its highly competitive value proposition stands out in the crowded automotive marketplace.
Performance vs. Sector and Market
The chart below illustrates PAG’s performance against the Consumer Discretionary Select Sector SPDR Fund ETF (NYSE:XLY) and the SPDR S&P 500 ETF Trust (NYSE:SPY) since QVI’s initial coverage of Penske Automotive Group in February 2019.
For example, PAG has significantly outperformed the total returns of its sector and the broader market during the coverage timeframe.
PAG Total Return Performance vs. XLY and SPY
Penske Automotive Group (PAG) Total Return: 195.60%
Consumer Discretionary Select SPDR ETF (XLY) Total Return: 27.56%
SPDR S&P 500 ETF Trust (SPY) Total Return: 51.89%
Since February 13, 2019 (as of January 11, 2023)Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, readers should visit Penske Automotive Group’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Penske Automotive Group: Bullish.
PAG Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
PAG’s earnings yield was trading well above the floor at 15.16%, as demonstrated in the below chart. In addition, at 9.61%, the free cash flow yield for PAG was also above the targeted threshold.
As inverse valuation multiples, the earnings and free cash flow yields suggest that PAG presently trades at a discount. QVI will further explore valuation multiples later in this report.
Dividend Yield
Penske offers a modest forward dividend yield of 1.72%, supported by a conservative 11.25% payout ratio, thus indicating a safe, well-covered dividend with room for annual raises.
PAG yielded 5.72% from an annual payout of $2.28 on a split- and dividend-adjusted cost basis of $39.83 per share on February 13, 2019, the date of QVI’s initial stock coverage. Thus, QVI’s yield-on-cost basis was trading at 400 basis points [bps] above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.54% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for PAG was 8.83% or +529 bps above the 10-Year and 10.16% or +662 bps above the Treasury yield when using the February 2019 yield-on-cost basis.
PAG Shareholder Yields (QVI Equity Bond Rate)
Penske Automotive Group (PAG) Price: $120.63
Penske Automotive Group (PAG) Earnings Yield: 15.16%
Penske Automotive Group (PAG) Free Cash Flow Yield: 9.61%
Penske Automotive Group (PAG) Dividend Yield: 1.72%
Penske Automotive Group (PAG) Equity Bond Rate: 8.83%
U.S. Ten Year Treasury Yield: 3.54%
One-Year Trailing (as of January 11, 2023)QVI’s shareholder yields rating for PAG: Bullish.
Penske Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, Penske had positive three-year annualized double-digit revenue growth of 25.00%, outperforming the 12.25% median growth for the consumer discretionary sector.
Penske had a trailing three-year pre-tax double-digit net profit margin of 5.14%, in line with the sector’s median net margin of 5.18%.
Returns on Equity and Invested Capital
Penske’s management was producing a trailing three-year return on equity or ROE of 34.30%, well above the targeted threshold and nearly tripling the sector’s median ROE of 12.92%.
Stock buyback programs often elevate ROE. As part of its Q1 2022 earnings release, the company’s board of directors announced a $250 million share repurchase authorization program.
At 17.37%, Penske’s three-year return on invested capital, or ROIC, exceeds the threshold and doubles the sector’s median ROIC of 6.59%, indicating that its senior executives are outstanding capital allocators.
Penske’s ROIC also more than doubled its trailing weighted average cost of capital or WACC of 6.74%. (Source of WACC: GuruFocus).
Double-digit revenue growth, a sector-competitive net profit margin, and attractive equity and capital returns indicate quality management performance in Bloomfield Hills.
PAG Fundamentals (QVI Returns on Management)
Penske Automotive Group (PAG) Annual YoY Revenue Growth: 25.00%
Penske Automotive Group (PAG) Profit Margin: 5.14%
Penske Automotive Group (PAG) Return on Equity: 34.30%
Penske Automotive Group (PAG) Return on Invested Capital: 17.37%
Three-Year Trailing (as of January 11, 2023)QVI’s fundamentals rating for Penske Automotive Group: Bullish.
Next, QVI dives into the valuation multiples, downside risks, potential catalysts, and overall investment thesis of Penske Automotive Group (PAG). Let’s dig further after reading the required disclosures and disclaimers.
Disclosure: I/we have no beneficial ownership in the shares of PAG and have no intention of initiating a position in the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Substack paid subscriptions). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Quality Value Investing (QVI) is a newsletter platform for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond the model portfolios, presented solely for educational purposes. David J. Waldron is an individual investor and author, not an investment adviser. Readers should always engage in their research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.