Penske Auto (PAG, Financial) shares sold-off sharply on concerns related to the Brexit vote as the company receives about 35% of its revenues from Britain. At the recent price around $40 per share, patient value investors may want to give a close look. Why? Three reasons suggest this is a worthwhile investment candidate: 1. Shares are cheap now by PAG’s own historical standards; 2. The company continues to undertake initiatives beneficial over the longer-term; 3. CEO and Chairman Roger Penske recently made a major buy at these levels.
Why not consider a profit opportunity either through outright share purchase, selling puts, or both?
1. Shares are inexpensive right now
A review of a company’s own past history is often a helpful guide to the future. And, as usual, a F.A.S.T. Graphs graphic helps us better understand a given situation.
Please take a look at the graph below. As a summary, the blue line represents the normal PE ratio for PAG over the time period. The orange line represents a standard “fair valuation” line at a constant 15x earnings and the black line represents the market price.
Note first how the market price has trended fairly consistently around the fair valuation line and normal PE line. This is particularly noticeable for the period of 2008 to 2015.
Now note that PAG’s 10-year normal PE ratio is about 13.3x earnings and that the current PE is 10.5x earnings.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Assuming earnings estimates hold, we can reasonably conclude that the market currently has priced shares below historical PE norms.
Another way to assess whether this might be a buying opportunity is to review previous annual PE levels. A review of the data for each year over the past six years suggests that each time PAG reached PE levels around 9X to 11X, the shares rebounded to 12X to 15X.
Data calculated from F.A.S.T. Graphs - All Rights Reserved
So what are shares worth?
If we apply a more normalized 13.3X PE ratio toward expected 2016 earnings, a price target around $50 seems reasonable. And S&P seems to agree as they have suggested a fair valuation around $51 based on their proprietary formula.
2. The company continues to undertake strategic initiatives
The company has been assertive in battling macro downtrends. Several areas seem to be well-positioned for longer-term growth, including service and parts as well as the finance and insurance areas. In addition, the company has continued its share buyback program.
The key seems to be patience -- the macro headwinds are real and the initiatives take time. Remember that a 2.8% dividend yield helps investors get paid as they wait.
3. CEO and Chairman Roger Penske is a buyer at these levels
Roger Penske (Insider Trades), CEO, chairman and 10% owner of Penske Automotive Group acquired 710,121 shares of the company on Aug. 2. The average price per share was $39.10, for a total transaction cost of $27,765,730.Â
In a nutshell
A favorable price-to-valuation review, a company working diligently to address headwinds and signficant insider buying combine to make PAG worth additional study at current levels.
Investors stand to profit either through outright purchase, selling puts or a combination of both.
Disclosure: No position in PAG but considering selling puts within the next 72 hours.
Start a free 7-day trial of Premium Membership to GuruFocus.Ă‚
