Penske Automotive Group is the second largest auto dealer in the US with 174 domestic franchises and 168 international franchises (mostly in the UK). The company has set out its strategy for the next 24 months as it sees potential gains from expanding its international network which currently accounts for 37% of revenues and, domestically, increasing its domestic Ford, GM, Chrysler ranges. Importantly the shift from Penske’s current strategy (with over 90% of revenues derived from non US manufacturers) comes at a time when analysts see Detroit's prospects and market share increasing.
The company has set aside over $100 million for acquisitions and expects to benefit as the US economy and auto sales continue to improve. Additionally the company also intends to expand in the UK where it already has a significant presence and in Germany and Italy where it has a smaller presence. However, possible expansion into China is not on the cards at the moment due to high cost of dealerships. Although future expansion there remains a possibility if valuations improve.
Penske suffered a sharp fall in revenues in 2008 and reported a net loss of $412 million. However, the company returned to profitability in 2009 and since then earnings have improved strongly. 2012 was a strong year on all measures with an 18% increase in revenues and record levels of unit sales, earnings and EPS. Earnings have continued to grow strongly in the first quarter 2013 as sales growth continues and as the company pushes high margin servicing and parts agreements with new sales. Penske is offering additional services including rapid repair and mirror tinting to make its warranties more attractive in attempt to win more of this business that generates gross margins of close to 60%.
The outlook is positive with Yahoo Finance consensus earnings pointing to annual growth of 15.6% over the next 5 years as general trading environment improves and Penske benefits from increased warranties sales and growing international business. The stock has increased over 35% in the past year but still looks reasonable on a multiple of 13 times forward earnings.
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Disclosure: The author holds no positions in the above mentioned stocks