S&P Raises Penske Ratings

According to Reuters, Standard & Poor's (S&P) Ratings Services has upgraded the corporate credit rating of Penske Automotive Group Inc. (PAG - Analyst Report) to 'BB-' from 'B+' based on the company’s improved credit measures with future betterment potentiality and flexible cash flows. S&P has also raised the issue ratings on the company’s 7.75% senior subordinated notes and 3.5% subordinated convertible notes to 'B' from 'B-.'

The rating agency remains consistent with the recovery ratings at ‘6,’ which indicates 0-10% recovery to the lenders in case of payment default. It has rendered a stable outlook for Penske based on the company’s business model, financial policy and operating records. Diverse revenue stream and flexible cost structure ensure a strong business profile for the company.

S&P believes that Penske has the opportunity for improving financial credit measures. Supply constrains of new and used vehicles will pull up the prices of the vehicles. Increase in demand from customers for new or nearly new vehicles will be boosting auto purchase.

Penske had cash and cash equivalents of $31.8 million as of March 31, 2012, an improvement from $28.5 million as of March 31, 2011. Long-term debt amounted to $848.6 million as of March 31, 2012.

Penske, in the first quarter of 2012, witnessed a 41% increase in earnings to 55 cents per share from 39 cents a year ago. The results surpassed the Zacks Consensus Estimate by 7 cents. The higher profit was attributable to strong performance in both the U.S. and international markets.

Total revenues escalated 17.9% year over year to $3.2 billion. The growth was driven by an increase in retail unit sale and improvement in the company’s used to new vehicle ratio.

Bloomfield Hills, Michigan-based Penske is the second-leading automotive retailer in the U.S. The company sells new and previously owned vehicles along with finance and insurance product. Apart from its franchises in the U.S. and Europe, the company offers repair and maintenance services for the brands it sells.

The company’s product mix, including a wide range of imported and luxury brands, helps it maintain a strong foothold in both the U.S. and international markets. It competes with Lithia Motors (LAD - Snapshot Report) and Sonic Automotive (SAH - Snapshot Report).

Currently, Penske retains a Zacks #1 Rank, which translates into a short-term (1 to 3 months) Strong Buy rating. We have a long-term (more than 6 months) Outperform recommendation on the stock.