Penske Automotive Group (PAG): Quote / Chart TTM P/E 10.99; Current year forward P/E (FY 2010): 10.60; Next full year forward P/E (FY2011) 8.38; Dividend yield: 0.00%. Based on the September 17, 2010 closing price of $11.98.
Penske Automotive Group, Inc (PAG). is headquartered in Bloomfield Hills, Michigan. Penske Automotive is the second largest publically traded automotive dealer in the US with 323 retail automotive franchises including 171 franchises in 17 states and Puerto Rico and 152 international franchises located mostly in the United Kingdom. They sell 40 different brandsof autos with about 96% of their revenue coming from sales of BMW, Honda, Lexus, Mercedes and Toyota. Penske also sells cars that tend to have limited dealerships in the US like Rolls Royce, Lamborghini, Bentley, Aston Martin, Bugatti, Ferrari, Porsche,Jaguar, Land Rover, smart, and MINI. Penske Automotive is the exclusive distributor of the smart fortwo supplying over 70 smart retail centers through its wholly-owned subsidiary smart USA Distributor LLC. They also own and operate 25 collision repair centers and have a minority stake (41% ownership) in Penske Truck Leasing. Penske Automotive employs over 14,000 worldwide.
Full year reported net income for 2009 was $76.5 million, or $0.91 per diluted share, compared to reported net loss of ($420.0) million, or a loss of ($4.47) per diluted share, for 2008 and reported net income of $120.3 million, or $1.27 per diluted share, for 2007.
They reported 2Q 2010 net income of $29.684 million or $0.32 per diluted share compared to a net income of $14.079 million or $0.15 per diluted share in 2Q 2009. During the first six months of 2010 they reported net income of $49,795 million, or $0.54 per diluted share compared to a net income of $30.361 million or $0.33 per diluted share for the first six months in 2009.
They have beat earnings estimates for six straight quarters after seeing sales decline and missing estimates for the final two quarters of 2008. Even though they had seen a large decrease in earnings in 2008, they were entirely due to Goodwill impairment charges, and without these charges they would have reported a gain larger than that seen in 2007.
Debt: As of December 31, 2009 the total long-term debt obligation was $ 946.408 million. Maturities of long-term debt for fiscal years 2010 is $12.442 million, 2011 is $313.050 million, 2012 is $150.134 million, 2013 is $73.048 million, 2014 is $1.257 million, and $413.393 million thereafter. As of June 30, 2010 long term debt totaled $844.292 million.
For Penske Automotive, long term debt tells only a portion of the debt story. All companies have other debt considerations like inventory and lease commitments, but Penske inventories are more expensive than most and they have a very high total for long term operating lease commitments that brings their total liabilities to $7.221 Billion on December 31, 2009.
Inventories make up about $1.196 Billion of this total and are shown as debt expenses for the current year. Inventories had increased to $1.365 billion on June 30, 2010 as they increased both new and used vehicle numbers, along with the number of dealerships.The loans taken for inventory purchases are generally due on demand, however the agreements in the US have allowed for repayments after vehicles are sold and in the UK, the sooner of the vehicle sale or 90 days, as long as interest payments are made in both cases. They also have a term loan and revolving credit agreement with Toyota Motor Credit and DFS USA LLC that allows for repayments as funds become available as long as interest payments are made and certain other covenants are met. Turnover rates seem to adequately address the inventory portion of this debt at this time.
Operating lease commitments make up the most significant portion of this debt totaling about $4.796 billion. Lease commitments due in less than a year totaled $178.5 million, those due in 1 to 3 years totaled $353.3 million, due in 3 to 5 years totaled $ 349.3 million and those due in more than 5 years $3.915 billion. The declining amount in these payments might give the illusion that these lease rates are decreasing over time, but it is more likely that existing leases are expiring and will need to be renewed. Penske leases or sub leases substantially all of its facilities and these leases are generally for a period of between five and 20 years. They most generally include renewal options at the company’s discretion.
The REITS that I have been investing in have been showing that rents are stabilizing to increasing, so it seems reasonable that these leases that become due will see increases in rents. The company hasn’t had a problem with these payments in the past and even with rent increases, they do not look like they will cause much of a problem into the future.
Penske believes that there will be continued consolidation within automotive retail operations. They continue to expand the franchise both domestically and internationally and are actively seeking additional dealerships that meet their long term goals along with selling off portions that do not fit within these plans.
Even though Penske has seen increased sales in the six months that ended June 30 over the same period a year earlier, they are still below historical volumes. Penske believes there will be continued challenges in the automotive retail sector given the current economic conditions and remains cautious. However, they also believe their premium brands like Audi, BMW, Cadillac and Porsche along with other luxury models that provided about 65% of their income in 2009 and usually see fewer fluctuations in sales during economic declines, will continue to do well. They also expect their service departments to remain busy as is normally the case which should temper any continued sales slump in their remaining model lines.
Penske and others in the automotive retail, parts manufactures and finished goods manufactures were recently downgraded by some analysts due to decreasing overall automotive sales during the June through August periods along with a decrease of 4000 vehicles in Ford’s fourth quarter build plan. However, sales decreases during this time period are not uncommon and are largely seasonal, and Ford increased production into this timeframe, expecting better sales than those that developed. These downgrades were made even though most are likely to report higher than expected earnings during this period, indicating the sector did better than expected even after the normal seasonal slowdown.
The downgrades were also made pursuant to reductions in expected sales for 2011 and small decreases in the current year by the same analysts; however these lowered sales expectations for 2011 were still quite a lot higher than the current year’s expectations. If the current expectations for 2011 are met, which seems likely given a normal growth rate in auto sales during a rebound, these downgrades, along with the recent pullbacks in the overall market might provide a buying opportunity in these stocks.
The company looks cheap at the current price, and with continued sales increases they will likely reinstate a dividend payment in the future, provided they meet the covenants placed on current loan agreements. I believe it is worth looking into further.
In previous articles we looked at Century Link (CTL), Spartan Stores Inc (SPTN), DTE Energy (DTE), The Dow Chemical Company (DOW), Ford Motor Company (F), CMS Energy Corp (CMS), Whirlpool Corporation (WHR ), American Axle (AXL), La-Z-Boy Inc. (LZB), and Domino’s Pizza Inc. (DPZ) .I think these companies are worth looking into too.
Have a great day trading,
Disclosure: I currently do not own any PAG, but I may buy it in the future.
Disclaimer: This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.