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On Aug 16, we maintained our Neutral recommendation on Penske Automotive Group, Inc. (PAG - Analyst Report). We appreciate the company’s improved performance in the second quarter of 2013. The company is expected to benefit from the increasing sales of new vehicles and acquisition of Western Star Trucks Australia business. However, we are concerned about the rising competition.

Why the Reiteration?

On Jul 31, Penske posted a 26.8% year-over-year increase in earnings per share to 71 cents in the second quarter of 2013. The results also exceeded the Zacks Consensus Estimate by 6 cents.

Revenues improved 11.6% year over year to $3.7 billion, beating the Zacks Consensus Estimate of $3.6 billion. The year-over-year rise in revenues was driven by a 14.1% increase in retail sales to 93,639 units.

Following the release of the second-quarter results, the Zacks Consensus Estimate for fiscal 2013 increased 3.5% to $2.65 per share. Moreover, the Zacks Consensus Estimate for fiscal 2014 rose 4.2% to $3 per share.  

Penske has been benefiting from the increase in sales of new vehicles over the past few years. During the first half of 2013, unit sales rose 10.6% to 97,270 units. The company expects the U.S. automotive market to improve further based on rising demand in the marketplace, increase in aging vehicle population, strong credit environment for consumers, together with introduction of new models by many different vehicle brands.

On Jul 28, Penske announced that it will be acquiring the Western Star Trucks Australia business from Transpacific Industries Group Limited. Penske will have favorable impacts from Western Star Trucks’ strong market dynamics, multiple growth options and well-established dealer network, which is one of the largest in Australia and New Zealand. After the completion of the acquisition in the third quarter of 2013, Penske is expected to generate added revenues of $420-$460 million. The acquisition is expected to enhance earnings per share by 10 cents to 14 cents annually.

However, Penske faces tough competition from other franchised automotive dealerships, private market buyers and sellers of used vehicles, internet-based vehicle brokers, national and local service and repair shops and parts retailers and automotive manufacturers. Rising competition together with increasing price transparency will lead to lower selling prices and are the headwinds for the company’s profitability.

Other Stocks to Look For

Currently, Penske retains a Zacks Rank #2 (Buy).

Some other stocks that are performing well in the industry where Penske operates include Asbury Automotive Group, Inc. (ABG - Snapshot Report), Lithia Motors Inc. (LAD - Snapshot Report) and Group 1 Automotive Inc. (GPI - Snapshot Report). Asbury and Lithia are Zacks Rank #1 (Strong Buy) stocks, while Group 1 carries a Zacks Rank #2 (Buy).


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