Here's Why You Should Retain Penske Stock in Your Portfolio Now

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Penske Automotive Group, Inc. PAG is a global leader in transportation services, specializing in automotive and commercial truck retail with a diverse international presence. Strategic acquisitions and joint ventures enhance the company’s prospects amid heavy investments in expansionary efforts and declining GPU from new vehicle sales.

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Penske is riding high on its strategic acquisitions. PAG completed acquisitions worth more than $340 million in annualized revenues last year. In 2024, Penske has completed acquisitions representing nearly $2.2 billion in estimated annual revenues, including $1.9 billion in retail automotive and $200 million in commercial trucks.

Penske’s strong balance sheet and investor-friendly moves instill optimism. Its long-term debt-to-capitalization of 26% compares favorably with the broader industry’s 58%. Low leverage and lack of debt maturities anytime soon give the company enough flexibility to tap into any growth opportunities. So far in 2024, PAG has hiked its payout four times. It has also bought back shares worth $77 million this year. Penske’s ROE of 18% compares favorably with the auto sector’s ROE of 9%, signaling management’s efficiency in rewarding shareholders.

Penske’s Premier Truck Dealership business spans 48 locations across North America, contributing to diversification. These new dealerships have seamlessly integrated, expanding the company’s Canadian presence. Penske maintains a strong position as a leading retailer of Daimler Trucks in North America. Penske expects solid Class 8 sales in 2024. A freight rate recovery is also projected in 2024 after nearly two years of decline.

The Penske Transportation Solutions (“PTS”) joint venture has also been enhancing the prospects of Penske Automotive, which holds 28.9% in PTS. In the last reported quarter, PTS’ revenues and profits were up 3% and 14%, respectively, on a year-over-year basis.

The company is heavily investing in expansionary efforts. Last year, Penske’s capital expenditure increased to $375 million compared to $282 million in 2022. While the company’s heavy investment in growth and expansion is likely to buoy its prospects, it may strain its near-term cash flows.

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Affordability challenges amid high costs of vehicle financing may weigh on the demand for vehicles, limiting Lithia’s near-term prospects. Its declining GPU from new vehicle sales is limiting overall margins. The downward trajectory of GPUs is expected to persist in the near term.

PAG currently carries a Zacks Rank #3 (Hold).