Penske Automotive Looks Fairly Valued
At the current price near $60 per share, we believe Penske Automotive Group Inc’s stock (NYSE: PAG) has reached its near term potential. PAG stock has risen 20% since the end of 2019 compared to the S&P 500 which has increased by 16% in the same period. Penske saw revenue fall by 15% in the first 3 quarters of 2020. For Q3 2020 revenues were flat while earnings improved to $3.07 compared to $1.42 in the same period of the previous year primarily due to lower operating expenses. The company has seen earnings fall over the recent years, while its P/E multiple has been rising. We believe the stock has reached its near term potential. Our dashboard ’Buy or Sell Penske Automotive Group Stock’ provides the key numbers behind our thinking.
Penske Automotive Group’s revenue rose from $22.8 billion in 2018 to $23.2 billion in 2019. Net Income margin fell from 2.1% in 2018 to 1.9% in 2019. On a per share basis, earnings went down from $5.52 to $5.28 offset by a 3% decrease in shares outstanding.
During the same period, the P/E multiple rose, as it grew from 7.3x to 9.5x. The P/E improved in 2020 and is currently at 11.5x.
Where Is The Stock Headed?
The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Penske Automotive Group’s revenues and earnings fell in the first nine months of 2020. Earnings were slightly higher as the company continues its focus on reducing expenditure, having eliminated $125-150 million of annualized expenditure across various segments. As per the Chairman after Q3 results, stronger cash flow has allowed the company to reduce long-term debt, lengthen maturities, and reduce future annual interest expense by an estimated $17 million.
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The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, focusing their attention on FY 2022 results. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
While Penske Automotive Group stock may have risen, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for General Motors vs Comcast.
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