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Growth & Income

Estimates have been rising for Penske Automotive Group, Inc. (PAG - Analyst Report) after the company reported record results for its fiscal third quarter on November 2.

Earnings per share jumped 31% year-over-year and came in 19% ahead of the Zacks Consensus Estimate. Analysts expect this strong earnings growth to continue for the remainder of 2011 and carry into 2012.

On top of strong earnings growth potential, Penske offers investors a dividend that yields 1.8%. Valuation looks attractive too with shares trading well below the industry average and sporting a PEG ratio of 0.7.

Company Description

Penske operates 325 retail automotive franchises, selling new and used vehicles, finance and insurance products and replacement parts, and provides maintenance and repair services on all brands it represents. The company has 170 franchises in 17 states and Puerto Rico and 155 franchises outside the U.S., primarily in the United Kingdom.

Penske is headquartered in Bloomfield Hills, Michigan and has a market cap of $1.9 billion.

Third Quarter Results

Penske reported record results for the third quarter on November 2. Earnings per share came in at 50 cents, beating the Zacks Consensus Estimate by 19%. It was a whopping 31% increase over the same quarter in 2010.

Total revenue rose 11% to $2.951 billion driven by a 16% jump in used retail unit sales. Overall retail unit sales increased 6%. The Services & Parts segment saw top-line growth of 9%. Sales were strong both internationally and in the U.S.

Meanwhile, gross profit improved from 15.7% to 15.8% of total revenues while operating income expanded from 2.5% to 2.7%.

Outlook

Analysts revised their estimates higher for both 2011 and 2012 following strong third quarter results, sending the stock to a Zacks #2 Rank (Buy).

The 2011 Zacks Consensus Estimate is now $1.68, representing 41% growth over 2010 EPS. The 2012 consensus estimate is currently $1.84, corresponding with 10% EPS growth.

Analysts expect a rebound in new vehicle sales and higher used vehicle prices to expand margins and drive EPS materially higher over the next couple of years.

Dividend

On top of strong EPS growth, Penske pays a dividend that yields a solid 1.8%. The company recently raised its quarterly dividend by 12.5%. This marks the second hike this year for the company.

It also brings the dividend back to where it was in 2008, before Penske suspended it amid the Great Recession.

Valuation

Valuation looks very reasonable for Penske. Shares trade at just 11.5x 12-month forward earnings, a significant discount to the industry average of 18.0x.

It sports a PEG ratio of only 0.7 based on a 5-year EPS growth rate of 15.5%.

Penske's price to book ratio of 1.7 is also well below the industry average of 2.9.

The Bottom Line

Penske offers investors strong growth potential along with a solid 1.8% dividend yield. With rising estimates and reasonable valuation, now might be a good time to get in.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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