Since July 2021, the S&P 500 has delivered a total return of 74.3%. But one standout stock has more than doubled the market - over the past five years, Penske Automotive Group has surged 158% to $200.46 per share. Its momentum hasn’t stopped as it’s also gained 22.3% in the last six months thanks to its solid quarterly results, beating the S&P by 13.6%.
Is there a buying opportunity in Penske Automotive Group, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Penske Automotive Group Will Underperform?
Despite the momentum, we’re sitting this one out for now. Here are three reasons you should be careful with PAG, plus one stock we’d rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales show the change in sales for a retailer’s e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Penske Automotive Group’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.
Penske Automotive Group has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 13.5% gross margin over the last two years. Said differently, Penske Automotive Group had to pay a chunky $86.50 to its suppliers for every $100 in revenue.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Penske Automotive Group, its EPS declined by 10.6% annually over the last three years while its revenue grew by 3.2%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Penske Automotive Group falls short of our quality standards. With its shares beating the market recently, the stock trades at 14.3× forward P/E (or $200.46 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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