Consider Penske Automotive At An Attractive Price

| About: Penske Automotive (PAG)

Summary

I see high growth prospects for Penske Automotive organically and through acquisitions.

PAG has been able to grow at a faster rate than the overall market and capture additional revenue on the service side of the business.

Regarding its valuation metrics, the stock, in my opinion, is undervalued.

According to Portfolio123's "All-Stars: Buffett" ranking system, the stock is ranked third among all Russell 1000 stocks.

The company is generating strong cash flows and returns substantial value to its shareholders through stock buybacks and increasing dividend payments.

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In my opinion, Penske Automotive Group, Inc. (NYSE:PAG) is an excellent combination of superb value and a strong growth dividend stock. The company delivered record earnings of $3.67 per share in 2015 and raised its dividend by 8.3%; the forward yield is pretty high at 3.06%.

Company Overview (from the company's website)

Penske Automotive Group is an international transportation services company that operates automotive and commercial vehicle dealerships principally in the United States and Western Europe, and distributes commercial vehicles, diesel engines, gas engines, power systems and related parts and services principally in Australia and New Zealand.

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Source: Q4 2015 Earnings Presentation

On February 05, PAG reported its fourth-quarter and full-year financial results that were in line with expectations. The company missed expectations in its prior quarter after considerably beating estimates in its two previous quarters, as shown in the table below:

Source: Yahoo Finance

Fourth-Quarter Highlights

  • Record results - best fourth quarter in company history on an adjusted basis
  • Retailed 110,100 new and used units; same-store +2.4%
  • Revenue +11.2% to $4.9 billion; +14.0% excluding foreign exchange
  • Same-store retail revenue +3.6%; +5.4% excluding foreign exchange
  • Income from continuing operations attributable to common shareholders $72.7 million, +4.5%, compared to adjusted Q4 2014
  • Earnings per share attributable to common shareholders of $0.81, +3.8%, compared to adjusted Q4 2014

In the report, Roger S. Penske, Penske Automotive Chairman, said:

The diversification provided by our business model continues to drive our business forward. Our U.K.-based retail automotive and U.S.-based commercial truck businesses produced exceptional results, and the stability of the parts and service business helped our business produce another solid quarter. We expect 2016 will be another solid year for both automotive and U.S. commercial truck sales.

I see high growth prospects for the company organically and through acquisitions. Penske Automotive completed its 2015 acquisition target by acquiring retail automotive and commercial truck dealerships, representing approximately $500 million in annualized revenue, further enhancing its diversification. PAG's brand mix is at 72% premium luxury brands which enabled the company to grow at a faster rate than the overall market and capture additional revenue on the service side of the business. However, the company's move into the commercial vehicle business in the U.S. offers an opportunity for further growth. According to the company, it expects to grow this year by 7% to 10%, probably a little more weighted towards acquisition. However, in my opinion, PAG could grow significantly higher. Last year, the company said that it would grow at about 10%, and eventually it grew by 11.9%, half of it organic and half of it through acquisitions.

Valuation

Since the beginning of the year, PAG's stock is down 19.8% while the S&P 500 Index has decreased 6.2% and the NASDAQ Composite Index has lost 10%. However, since the beginning of 2012, the stock has gained 76.4%. In this period, the S&P 500 Index has increased 52.5% and the NASDAQ Composite Index has risen 72.9%. Considering its compelling valuation and its high growth prospects, the drop in its price creates an excellent opportunity, in my opinion, to buy the stock at an attractive price.

PAG Daily Chart

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PAG Weekly Chart

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Charts: TradeStation Group, Inc.

Regarding its valuation metrics, PAG's stock, in my opinion, is undervalued. The trailing P/E is very low at 9.35, and the forward P/E is even lower at 7.97. The Enterprise Value/EBITDA ratio is low at 11.89, and the price-to-sales ratio is extremely low at 0.16. Furthermore, the PEG ratio is very low at 0.85. The PEG - price/earnings to growth - ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.

On January 28, Penske Automotive announced that its Board of Directors has approved an increase in the cash dividend to $0.26 per share for the fourth quarter of 2015. The company raised the dividend for the 19th consecutive quarter. The forward annual dividend yield is pretty high at 3.06%, and the payout ratio is only 21.1%. The annual rate of dividend growth over the past three years was high at 26.9%, over the past five years was also very high at 40.7%, and over the last 10 years was at 15.4%.

PAG Dividend Chart

PAG Dividend data by YCharts

During the three months ended December 31, 2015, the company acquired 571,313 shares of its common stock for approximately $27.0 million. For the 12 months ended December 31, 2015, the company acquired 854,313 shares of its common stock for $40.9 million. In December 2015, the Board of Directors increased the authorization to repurchase shares, and as a result, the company has a current share repurchase authorization of approximately $200.0 million.

Ranking

According to Portfolio123's "All-Stars: Buffett" ranking system, PAG's stock is ranked third among all Russell 1000 stocks. The "All-Stars: Buffett " ranking system is based on investing principles of the well-known investor Warren Buffett.

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The ranking system is quite complex, and it takes into account many factors like book value growth, operational P/E, price-to-book value, trailing P/E, price-to-tangible book value, price-to-cash flow and EPS stability, as shown in Portfolio123's chart below:

Back-testing over 16 years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.

Summary

In my opinion, PAG is an excellent combination of superb value and a strong growth dividend stock. The company delivered record earnings of $3.67 per share in 2015 and raised its dividend by 8.3%; the forward yield is pretty high at 3.06%. I see high growth prospects for the company organically and through acquisitions. Penske Automotive completed its 2015 acquisition target by acquiring retail automotive and commercial truck dealerships, representing approximately $500 million in annualized revenue, further enhancing its diversification.

Regarding its valuation metrics, the stock, in my opinion, is undervalued. The trailing P/E is very low at 9.35, and the PEG ratio is also very low at 0.85. According to Portfolio123's "All-Stars: Buffett" ranking system, PAG's stock is ranked third among all Russell 1000 stocks. Furthermore, Penske Automotive is generating strong cash flows and returns substantial value to its shareholders through stock buybacks and increasing dividend payments. All these factors bring me to the conclusion that PAG's stock is a smart, long-term investment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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 Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.