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Penske (PAG) Rides on New Dealership Amid High Competition

Zacks Equity Research

On Aug 16, we issued an updated research report on Penske Automotive Group, Inc. PAG.

The company deals in the operation of commercial truck and automotive dealerships in the United States, Canada and Western Europe.

Penske benefits from its enhanced digital capabilities. In the second quarter, 33% of the company’s new and used unit sales in the United States were from digital sources. Also, it continues to reduce its reliance on third-party leads. In fact, the company holds more than 60,000 vehicles online that are ready to be purchased.

New acquisitions or dealership openings in the United States and the European market are likely to help Penske Automotive expand business. The completion of a Commercial Truck Dealership acquisition in July 2019 is expected to generate more than $1.1 billion in revenues. This is most likely to increase the company’s growth and enhance its non-auto diversification. Moreover, the company with 25 dealerships is currently the leading Freightliner and Western Star dealership group in North America.

Penske’s product diversification, stand-alone used-vehicle supercenters as well as robust demand for medium duty and Class 8 heavy-duty in North America have contributed to revenues. Further, these factors are expected to continue in 2019 as well, which are likely to improve sales and profitability. Also, higher number of off-lease used-vehicles in the market might drive the company’s used-vehicle sales.

However, exposure to currency fluctuation is hampering the company’s international business. In addition, its status is affected by the economic and political conditions of markets it has expanded presence in. Rising competition with other franchised automotive dealerships and increasing price transparency further adds to company’s headwinds.

In the second quarter 2019, new-vehicle revenues declined 8.6% year over year. This is likely to hamper Penske’s top line. The plunge in new vehicle sales was primarily caused by introduction of light-vehicle testing procedure called WLTP in Europe.  A similar declining trend is expected to continue in the upcoming quarters.

In the past six months, Penske has underperformed the industry it belongs to. During the same time frame, the company’s shares have declined 3.9% against the industry’s growth of 13.6%.

Zacks Rank & Stocks to Consider

Currently, Penske carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the auto space are Fox Factory Holding Corp FOXF, CarMax, Inc. KMX and Gentex Corporation GNTX, each presently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fox Factory has an expected long-term growth rate of 16.7%. In the past six months, shares of the company have rallied 20.7%.

CarMax has an expected long-term growth rate of 12.6%. In the past six months, shares of the company have risen 36.3%.

Gentex has an expected long-term growth rate of 5%. In the past six months, shares of the company have returned 29.5%.

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