Penske Automotive Group, IncKey arguments in support of the idea.
• The robust state of the U.S. automotive market suggests potential revenue growth for PAG in the upcoming years.
• PAG's stock appears undervalued when compared to its historical average levels.
Investment Thesis
Penske Automotive Group Inc. (PAG) is a diversified international transportation services company and one of the world's premier automotive and commercial truck retailers. According to full-year 2023 data, approximately 85% of the company's revenue was generated from the retail sales of passenger cars, with 55% of these sales occurring in the U.S. and 40% in the U.K. Additionally, PAG own 28.9% of Penske Transportation Solutions, a business that manages one of the largest and modern trucking fleets in North America with trucks, tractors, and trailers under lease, rental, and/or maintenance contracts.
U.S. light vehicle sales volumes are witnessing continuous growth, while selling prices have begun to stabilize. This scenario is favorable for sustained revenue growth for Penske Automotive. According to our automotive analyst Mike Ward, U.S. new light vehicle sales in the third quarter increased by 0.7% y/y, after adjusting for days sales data from the same period last year. For the entire year of 2024, U.S. new light vehicle sales are projected to reach 15.7 million units, reflecting a 1% y/y increase, marking the highest level since 2019. Looking ahead to 2025, the growth rate could accelerate to 3.5% y/y, with sales reaching 16.25 million vehicles. Approximately 40% of PAG Motors' total revenue is derived from new car sales. Meanwhile, used passenger car sales in the U.S. have stabilized at around 3 million units monthly since February, aligning with 2023 sales figures. This trend further supports the robust performance of the company’s used car segment, which contributes 30% to its total revenue. Additionally, the average prices for U.S. auto sales are showing a minor year-over-year decline, although they remain near record highs observed over the past three years. We anticipate that PAG's revenue will reach $30.16 billion in 2024, marking a 2.1% increase year-over-year. Looking further ahead, 2025 could see revenue climbing to as high as $31.37 billion, a 4.0% y/y increase.
Penske has crafted a disciplined and well-balanced capital allocation strategy. In a conversation with Mike Ward, Roger Penske highlighted that the company's management team, who are also significant shareholders, is deeply committed to the continual payment of dividends. The company boasts a track record exceeding a decade of annual dividend payouts, with an average annual growth rate of over 17% in quarterly dividend disbursements since the start of 2014. This financial discipline is underpinned by robust and reliable cash flow, enabling the company to consistently execute share repurchases each year. Roger Penske elaborated that management takes a comparative approach to profit distribution, always scanning for opportunities to scale the business. When the prospective returns from new acquisitions surpass those anticipated from stock buybacks, the company opts for expansion. We project that, by 2025, the overall cash return to shareholders through dividends and buybacks could approximate 5.4% of the company's current market capitalization.
The valuation of PAG shares appears compelling when compared to historical averages. Historically, over the last 20 years, the PAG stock valuation has fluctuated within an EV/EBITDA multiple range of 8.5x to 9.5x. For 2024, we project the company's EBITDA might reach as much as $1.47 billion, with the potential to climb to $1.5 billion in 2025. If the company aligns its valuation closer to the historical average EV/EBITDA multiple, the stock could present a potential upside nearing $200.
The target price for shares of Penske Automotive Group Inc. over the next 12 months is set at $200, with a “Buy” recommendation.
