Penske Automotive Group: Motoring Into The Future

Summary

• Vehicle sales have not shown significant growth in the past few years.
• However, Penske has been able to mitigate this by increasing revenue generated by its Finance & Insurance and Service & Parts departments.
• With the trade war slowly being settled, the losses that it created in the automobile sector should reverse and create a boost to the industry.
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Take care of your car in the garage, and the car will take care of you on the road. – Amit Kalantri

Penske Automotive Group, founded in 1990, has seen a steady increase in fortunes. Primarily a car and truck dealership, it has dealerships in the US, Canada and Western Europe that is included in the Fortune 500. However, vehicle sales in the US, mirrored in the other countries Penske is based, have been flat in the past few years. This is clear from FRED’s total vehicle sales statistics over the past five years.

In such an environment, it would seem that automotive companies would be suffering. However, Penske’s revenue and earnings have continued to grow in this time period.

These two facts seem to be contradictory. However, the driver of earnings and revenue growth has not been in an increase in vehicle sales (same-store retail sales of new and used cars were flat in 3Q 2019), but in growth in its Parts & Services and Finance & Insurance businesses. This diversification has seen Parts & Services account for 45.8% of gross profit, with Finance & Insurance also becoming a significant source of profit.

In addition, the fundamentals of the business are likely to be improved as the trade war dampens. Chinese tariffs, as estimated by economist Michael Waugh, reduced US vehicle sales by $9.3 billion since being raised. If the tariffs are reduced due to a trade settlement being reached, the US consumer dependent on income raised from Chinese exports will have greater ability and inclination to purchase a new vehicle.

However, the share price has not followed the growth in revenue and earnings. Much like vehicle sales, it has remained flat through the time period. Does this present a buying opportunity? The RSI has fallen recently in line with a sell-off, indicating that the

Analyst’s 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.

This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.