While the overall auto sector is one of the worst-hit by coronavirus-induced microchip shortage compounded by the Russia-Ukraine war, one sub-industry that’s still in good shape is the auto retail space. Evidently, The Zacks Auto Retail & Whole Sales industry has outperformed the Zacks S&P 500 composite as well as the Auto-Tires-Truck sector over the past year. The industry has inched up 0.3% year to date compared with the S&P 500’s and the sector’s decline of 14.4% and 30.4%, respectively.

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What’s Driving the Auto Retail Industry?

For starters, demand for personal mobility has been on the rise. And while the chip crunch has tightened the inventory levels of auto retailers, the supply-demand mismatch has resulted in higher average transaction prices of vehicles. As such, auto retailers are recording high vehicle margins, which are boosting their bottom line. Also, the ramp-up of digitization by auto retailers has been aiding sales. Initiatives like ship-to-home next day, curbside pick-up option, and buy online, pick-up in stores options are picking pace, driving additional traffic to companies’ online sites. Enhanced digital solutions are providing shoppers with a truly comprehensive and personal experience. Most auto retailers are focused on strengthening their foothold through strategic acquisitions, which have been bolstering their scalability, revenue and competitive advantage.

Riding on high demand, strong vehicle margins, digitization ramp-up and strategic buyouts, auto retailers are generating record profits. Free cash flow is soaring, and companies are actively boosting shareholder value via dividends and share buybacks. These investor-friendly moves are instilling confidence among shareholders.

PAG Emerges as Winner, Races Past Auto Retail Peers YTD

While the flourishing auto retail sector has a number of attractive stocks, Penske Automotive (PAG Quick QuotePAG - Free Report) is one company that has certainly grabbed the attention of many investors lately. It is having an amazing run on the bourses and has outpaced all its major peers— including Lithia Motors (LAD Quick QuoteLAD - Free Report) , Asbury Automotive (ABG Quick QuoteABG - Free Report) , Sonic Automotive (SAH Quick QuoteSAH - Free Report) and others— so far this year.

Penske has emerged as the top-performing auto retail stock on a year-to-date basis. Shares of PAG hit an all-time high yesterday and the company looks poised to continue its solid performance. Year to date, Penske has risen around 12%, outperforming its peers.

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While Penske currently carries a Zacks Rank #2 (Buy), LAD, ABG and SAH are presently Ranked #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

Penske has outpaced the Zacks Consensus Estimate in each of the trailing four quarters. In this time frame, it has delivered an earnings surprise of roughly 17.7%, on average.The Zacks Consensus Estimate for Penske’s 2022 earnings and sales implies year-over-year growth of 10% and 10.7%, respectively. Over the past 30 days, the Zacks Consensus Estimate for Penske for 2022 has increased around 60 cents a share. The consensus estimate for second-quarter 2022 has also been revised 16 cents upward over the same time frame. The favorable estimate revisions instill investor confidence in the stock.

Don’t Be Tempted to Cash Out the Gains

If you are thinking to sell Penske as it pushes into an all-time high, better to reconsider. We are positive about the company’s prospects and believe that it is poised to carry the momentum ahead. Let’s check out what’s playing out in favor of the stock.

Penske is riding high on its strategic acquisitions. It has become the largest dealership group for Freightliner in North America with Warner Truck Centers buyout. This aided the company to diversify the business, expand its customer base and capitalize on the Retail Commercial Trucks segment. The buyouts of Kansas City Freightliner, McCoy and Team Trucks Centers further boosted Penske’s top line. Notably, over the past 12 months, the company has completed acquisitions or opened new dealerships that would add around $2 billion in annualized revenues.

As part of the firm’s used-vehicle expansion, Penske’s U.S. supercenters have been rebranded as CarShop. In the last reported quarter, CarShop unit sales and revenues increased 71% and 113% to 19,500 units and $516 million, respectively. Penske is on track to step up its CarShop footprint from its current 23 locations to 40 by the end of 2023, thereby retailing at least 150,000 units by 2023 and generating $2.5-$3 billion in total revenues by the same timeframe. The expansion of digital capabilities has been aiding the firm. Digital tools available on www.carshop.com provide a comprehensive and seamless online shopping experience to customers.

The Penske Transportation Solutions (PTS) joint venture has also been enhancing the prospects of Penske Automotive— which holds 28.9% in PTS. In the last reported quarter, PTS generated revenues and profits of $3.1 billion and $410 million, up 22% and 121%, respectively, on a year-over-year basis. The acquisition of Black Horse Carriers is driving PTS revenues. As of Mar 31, 2022, PTS operated a fleet of more than 373,000 vehicles, up 38,000 units from the year-ago level.

We also like PAG’s healthy balance sheet and its commitment to maximizing shareholders' value. Penske’s debt-to-capitalization of 26% compares favorably with the industry’s 42%. In addition to the low leverage and lack of debt maturities anytime soon, Penske has over $1.3 billion in liquidity. Driven by strong cash flow, Penske returned more than $436 million to shareholders in 2021 through share repurchases ($293.5 million) and cash dividends ($142.5 million). In 2021, the company hiked its quarterly dividend four times. So far this year, it raised payout twice. Last month, it boosted its share repurchase authorization to $250 million. Considering all these tailwinds, it’s wise to stay invested in Penske.