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We are reiterating our Outperform recommendation on Penske Automotive Group Inc. (PAG - Analyst Report). The company continues to benefit from strong foothold in both the U.S. and overseas markets owing to the wide range of imported and luxury brands.
Penske witnessed a 41% year over year increase in earnings to 55 cents per share in the first quarter of 2012, surpassing the Zacks Consensus Estimate by 7 cents. The increase in profit was attributable to strong performance of the company in both the U.S. and international markets.
Revenues escalated 17.9% year over year to $3.2 billion. An 18.1% increase in retail unit sales and improvement in the company’s used to new vehicle ratio led to the improved results.
The company expects its revenues to increase roughly $525 million on an annualized basis owing to the acquisition of dealerships. It acquired seven franchises in 2011 including Crevier BMW-MINI, in Santa Ana, California, and Mercedes-Benz of Greenwich, Connecticut.
Penske is returning value to its shareholders by increasing the dividend payout and repurchasing shares. Dividend payment has increased from 7 cents per share in the second quarter of 2011, to 11 cents per share as of Mary 8, 2012. The improvement in dividend payouts reflects the company’s improved performance and strong balance sheet.
The company’s share repurchase strategy will also drive its earnings. It has repurchased shares worth $106.8 million in 2011. Moreover, in the first quarter of 2012, 350,000 shares were repurchased for $8.5 billion.
However, Penske is under pressure from the other franchised automotive dealerships and service centers owned by OEMs. The OEMs are undergoing expansion in order to increase the consumer base and establish direct contact with them.
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. It competes with Lithia Motors (LAD - Snapshot Report) and Sonic Automotive (SAH - Snapshot Report).
Our long-term recommendation is backed by a Zacks #2 Rank, which translates into a short-term (1 to 3 months) Buy rating.
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