The stock of Penske Automotive Group (NYSE:PAG, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $79.09 per share and the market cap of $6.4 billion, Penske Automotive Group stock gives every indication of being significantly overvalued. GF Value for Penske Automotive Group is shown in the chart below.
Because Penske Automotive Group is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.6% over the past three years and is estimated to grow 3.35% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Penske Automotive Group has a cash-to-debt ratio of 0.02, which ranks in the bottom 10% of the companies in Vehicles & Parts industry. Based on this, GuruFocus ranks Penske Automotive Group's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Penske Automotive Group over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Penske Automotive Group has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $21.2 billion and earnings of $8.38 a share. Its operating margin is 3.86%, which ranks in the middle range of the companies in Vehicles & Parts industry. Overall, GuruFocus ranks the profitability of Penske Automotive Group at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Penske Automotive Group over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Penske Automotive Group is 0.6%, which ranks in the middle range of the companies in Vehicles & Parts industry. The 3-year average EBITDA growth rate is 9%, which ranks better than 72% of the companies in Vehicles & Parts industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Penske Automotive Group's ROIC is 6.20 while its WACC came in at 6.79. The historical ROIC vs WACC comparison of Penske Automotive Group is shown below:
In summary, the stock of Penske Automotive Group (NYSE:PAG, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 72% of the companies in Vehicles & Parts industry. To learn more about Penske Automotive Group stock, you can check out its 30-year Financials here.
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