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On Feb 25, we maintained our Neutral recommendation on Penske Automotive Group Inc. (PAG - Analyst Report), despite the challenging market condition for new and used cars and rising competition from the retail and service centers owned by original equipment manufacturers, due to its wide range of imported and luxury brands, which helps it to maintain a strong foothold in the U.S. and overseas markets.

Why Maintained?

Penske posted a 21.3% increase in profits to 57 cents per share in the fourth quarter of 2012 from 47 cents in the same quarter of 2011. Profit per share exceeded the Zacks Consensus Estimate by 4 cents. Net profits increased 19.5% to $51.0 million in the quarter from $42.7 million a year ago.

Revenues escalated 17.9% to $3.4 billion, including an 11.4% rise in same-store retail revenues in the quarter. Revenues were marginally higher than the Zacks Consensus Estimate of $3.3 billion.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for fiscal 2013 increased 2.8% to $2.54 per share. The Zacks Consensus Estimate for fiscal 2014 also went up 3.6% to $2.86 per share.

Penske benefits from its diversified revenue stream. A significant portion of the company’s profit is derived from higher-margin service and parts sales, which are less cyclical than retail vehicle sales and thus provides stability to the company.

In addition, the company benefit from its expansion strategy. It has expanded its global presence by closing accretive acquisitions in Northern Ireland and Italy. It has also expanded its footprint domestically by entering the Madison, WI market.

However, the company faces tough competition from the retail as well as service centers owned by OEMs. In addition, the retail vehicle market in the U.S. remains challenging for both new and used car sales volume.
Other Stocks to Look For

Few stocks that are performing well in the industry where Penske operates are Asbury Automotive Group, Inc. (ABG - Snapshot Report), Lithia Motors Inc. (LAD - Snapshot Report) and America's Car-Mart Inc. (CRMT - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

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