Since August 2021, the S&P 500 has delivered a total return of 75.7%. But one standout stock has doubled the market - over the past five years, Penske Automotive Group has surged 151% to $213.19 per share. Its momentum hasn’t stopped as it’s also gained 28.7% in the last six months thanks to its solid quarterly results, beating the S&P by 15.8%.
Is there a buying opportunity in Penske Automotive Group, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, 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 we avoid PAG, plus one stock we’d rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Penske Automotive Group’s demand within its existing locations has been relatively stable over the last two years but was below most retailers. On average, the company’s same-store sales have grown by 1.1% per year.
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% gross margin over the last two years. That means Penske Automotive Group paid its suppliers a lot of money ($87.03 for every $100 in revenue) to run its business.
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 10.1% annually over the last three years while its revenue grew by 3.5%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
We see the value of companies helping consumers, but in the case of Penske Automotive Group, we’re out. With its shares beating the market recently, the stock trades at 15.6× forward P/E (or $213.19 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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