While the auto sector in general has been one of the hardest hit by the coronavirus-induced microchip shortage, exacerbated by the Russia-Ukraine war, one sub-industry still in good shape is the auto retail space. It is clear that the Zacks Auto Retail & Whole Sales industry has outperformed the Zacks S&P 500 composite and the auto tire truck sector in the past year. The sector is up 0.3% so far compared to the S&P 500s and the sector is down 14.4% and 30.4% respectively.
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What drives the auto retail trade?
For starters, the demand for personal mobility is increasing. And while the chip crunch has tightened auto dealership inventory levels, the mismatch between supply and demand has resulted in higher average vehicle transaction prices. As such, auto retailers book high vehicle margins, boosting their profits. Increasing digitization by car dealers has also boosted sales. Initiatives such as next day home delivery, curbside pickup and online purchase options are increasing at a faster rate, driving additional traffic to companies’ online sites. Enhanced digital solutions provide shoppers with a truly comprehensive and personalized experience. Most auto retailers are focused on strengthening their position through strategic acquisitions, which have strengthened their scalability, revenue and competitive advantage.
High demand, strong automotive margins, increasing digitization and strategic buyouts are generating record profits for automotive retailers. Free cash flow is booming and companies are actively driving shareholder value through dividends and share buybacks. These investor-friendly moves inspire confidence among shareholders.
PAG emerges as winner, races past Auto Retail Peers YTD
While the booming auto retail industry has some attractive stocks, Penske Automotive †PAG † Free Report) is a company that has certainly caught the attention of many investors lately. It has had a great run in the exchanges and has outpaced all of its major competitors including Lithia Motors †BOY † free report), Asbury Automotive †ABG † free report), Sonic Automotive †SAH † Free Report) and others – so far this year.
Penske has emerged as the top performing auto retailer year-over-year. Shares of PAG hit an all-time high yesterday and the company looks poised to continue its solid performance. So far, Penske is up about 12%, outperforming its competitors.
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While Penske currently holds Zacks Rank #2 (Buy), LAD, ABG, and SAH are currently Ranking #3 (Hold). You can see the full list of current Zacks #1 Rank (Strong Buy) stocks here†
Penske outperformed the Zacks Consensus Estimate in each of the last four quarters. In this time frame, it has delivered a profit surprise averaging about 17.7%. The Zacks Consensus Estimate for Penske’s 2022 earnings and revenue implies annual growth of 10% and 10.7%, respectively. In the past 30 days, the Zacks Consensus Estimate for Penske for 2022 is up about 60 cents per share. The consensus estimate for the second quarter of 2022 has also been revised upwards by 16 cents over the same period. The favorable revisions to estimates give investors confidence in the stock.
Don’t be tempted to cash out the winnings
If you’re considering selling Penske while it’s hitting an all-time high, you’d better reconsider. We are positive about the company’s outlook and believe it is poised to continue the momentum. Let’s take a look at what’s playing in the stock’s favor.
Penske prides itself on its strategic acquisitions. It has become the largest Freightliner dealer group in North America with an acquisition by Warner Truck Centers. This helped the company diversify the business, expand its customer base and capitalize on the Retail Commercial Trucks segment. The Kansas City Freightliner, McCoy and Team Trucks Centers acquisitions further boosted Penske’s sales. Specifically, in the past 12 months, the company completed acquisitions or opened new dealerships that would bring in approximately $2 billion in annual revenue.
As part of the company’s expansion into the used vehicle space, Penske’s US supercenters have been rebranded as CarShop. In the last reported quarter, CarShop unit sales and revenues increased 71% and 113% to 19,500 units and $516 million, respectively. Penske is on track to increase its CarShop footprint from its current 23 locations to 40 by the end of 2023, selling at least 150,000 units by 2023 and generating $2.5-$3 billion in total revenue over the same period. The expansion of digital capabilities has helped the company. Digital tools available at www.carshop.com provide customers with a comprehensive and seamless online shopping experience.
The Penske Transportation Solutions (PTS) joint venture has also improved the prospects of Penske Automotive, which owns 28.9% in PTS. In the last reported quarter, PTS generated revenues and profits of $3.1 billion and $410 million, up 22% and 121% year-over-year, respectively. The acquisition of Black Horse Carriers boosts PTS’s revenues. As of March 31, 2022, PTS had a fleet of more than 373,000 vehicles, an increase of 38,000 units from a year ago.
We also appreciate PAG’s healthy balance sheet and its commitment to maximizing shareholder value. Penske’s debt-to-capitalization of 26% compares favorably with the industry’s 42%. In addition to the low leverage and lack of short-term debt maturities, Penske has more than $1.3 billion in liquidity. Driven by strong cash flow, Penske returned more than $436 million to shareholders in 2021 through share buybacks ($293.5 million) and cash dividends ($142.5 million). In 2021, the company increased its quarterly dividend four times. This year it has increased the payout twice so far. Last month, it increased its share buyback authorization to $250 million. Given all these headwinds, it makes sense to continue investing in Penske.