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On May 1, we maintained our Neutral recommendation on Penske Automotive Group Inc. (PAG - Analyst Report) based on its wide range of imported and luxury brands, which helps it to maintain a strong foothold in the U.S. and overseas markets. However, we are concerned about the challenging market condition for new and used cars and rising competition from the retail and service centers owned by original equipment manufacturers.

Why Maintained?

On Apr 29, Penske posted a 14.5% increase in earnings per share to 63 cents in the first quarter of 2013 from 55 cents in the corresponding quarter last year. Earnings in the quarter exceeded the Zacks Consensus Estimate by a penny.

Revenues improved 7.7% to $3.40 billion, missing the Zacks Consensus Estimate of $3.45 billion. The year-over-year rise in revenues was driven by a 9.9% increase in retail sales to 85,821 units.

Following the release of the first quarter results, the Zacks Consensus Estimate for fiscal 2013 decreased 0.39% to $2.55 per share. The Zacks Consensus Estimate for fiscal 2014 remained flat at $2.85 per share. Currently, Penske maintains a Zacks Rank #3 (Hold).

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

In addition, the company benefits from its expansion strategy. It has expanded its global presence by closing 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

Some other stocks that are performing well in the industry where Penske operates include Asbury Automotive Group, Inc. (ABG - Snapshot Report), AutoNation Inc. (AN - Analyst Report) and Lithia Motors Inc. (LAD - Snapshot Report). All these companies carry a Zacks Rank #2 (Buy).

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