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Bull of the Day: Penske Automotive Group, Inc. (PAG)

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Penske Automotive Group (PAG - Free Report) , a Zacks Rank #1 (Strong Buy), is a long-term stock market winner within the Zacks Retail and Wholesale sector. PAG hit an all-time high in price earlier this month, all while most stocks hover in bear market territory. A slight retreat in price over the past few weeks presents investors with a solid buying opportunity. The company’s longevity and continued stock price ascent speak to management’s ability to adapt to the ever-changing market landscape.

PAG sports the highest Zacks Momentum Style Score of ‘A’. The company is part of the Zacks Automotive – Retail and Whole Sales industry group, which ranks in the top 8% out of more than 250 Zacks Ranked Industries. Also note the favorable metrics for this industry group below:

Zacks Investment Research
Image Source: Zacks Investment Research

Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.

Company Description

Penske Automotive Group is a diversified transportation services company that operates automotive and commercial truck dealerships. PAG engages in the sale of new and used motor vehicles, related services such as collision repair, as well as the placement of lease contracts and third-party insurance products.

PAG also distributes diesel and gas engines as well as power systems. The company operates 320 retail franchises, 23 used vehicle dealerships, and 37 commercial truck dealerships across the United States and Canada. Penske Automotive Group was incorporated in 1990 and is based in Bloomfield Hills, MI.

Earnings Trends and Future Estimates

PAG has built up an impressive earnings history, surpassing earnings estimates in each of the last eleven quarters. Back in April, the company reported Q1 EPS of $4.76, a 20.81% surprise over the $3.94 consensus estimate. PAG has delivered a +17.73% average earnings surprise over the last four quarters.

The PAG growth engine is expected to remain hot this year, as analysts covering the transportation company have increased their full-year EPS estimates by +15.41% in the past 60 days. The 2022 Zacks Consensus EPS Estimate now stands at $17.38, reflecting potential growth of 13.74% relative to last year. Sales are anticipated to climb 10.53% to $28.24 billion.

Zacks Investment Research
Image Source: Zacks Investment Research

Let’s Get Technical

PAG shares have advanced over 45% in the past year. Only stocks that are in extremely powerful uptrends are able to make this type of price move while the market makes a series of lower lows. This is the kind of stock we want to include in our portfolio – one that is trending well and receiving positive earnings estimate revisions.

Image Source: StockCharts

Notice how the 200-day moving average (blue line) is sloping up and has acted as support this year throughout the bullish move. The stock had been making a series of higher highs through early June, and the recent pullback represents a solid buying opportunity. With both strong fundamentals and technicals, PAG is poised to continue its outperformance.

Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, Penske Automotive has recently witnessed positive revisions. As long as this trend remains intact (and PAG continues to deliver earnings beats), the stock will likely continue its bullish run this year. Cautious investors may feel hesitant about investing in a stock that has come this far over decades, but the fact is this elite company is still outperforming.

Other Factors to Consider

Despite the massive price run, PAG currently trades relatively undervalued at just a 6.1 forward P/E. Its Price/Sales ratio of 0.3 compares favorably to that of its industry (0.31) and the S&P 500 (2.65).

Management is confident that future earnings will be able to sustain higher dividend payments. Last year, the company hiked its dividend four times, and PAG has already increased it twice this year. Penske currently pays an annual dividend of $2.00, which translates to a 1.9% yield.

In another investor-friendly move, Penske repurchased 1.9 million shares totaling $184.1 million through April 30th of this year. The company has an additional $46.3 million available for repurchase under its existing share buyback program.

Bottom Line

Solid institutional buying should continue to provide a tailwind for the stock price. PAG is ranked favorably by our Style Score Categories with an ‘A’ for Value and ‘A’ for Momentum, paving the way for an overall ‘A’ VGM score. This indicates that there’s a strong likelihood that momentum will continue on the heels of strong sales and earnings growth.

Robust fundamentals combined with a strong technical trend certainly justify adding shares to the mix. Backed by a leading industry group and robust history of earnings beats, it’s not difficult to see why this company is a compelling investment. This long-term stock market winner continues to prove its doubters wrong, and investors would be wise to consider PAG as a portfolio candidate if they haven’t already done so.

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