On Thursday, Stephens initiated coverage on Penske Automotive Group (NYSE:PAG) with an Equal Weight rating and a price target of $161. The firm's valuation is based on Penske's long-term average enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple of 8.4x, applied to the 2025 EBITDA estimate.
Penske Automotive Group stands out among its peers, known as the Public 6, due to its diversified revenue streams. Approximately 20% of its gross profit is sourced from non-auto dealer operations, including commercial truck dealerships and its equity interest in Penske Transportation Solutions. The company also boasts a significant international presence, with around 40% of its revenue coming from six countries.
The brand mix at Penske is particularly distinct, with luxury brands constituting 79% of its portfolio, imports 21%, and domestic brands less than 1%. Despite the company's strong points, Stephens expresses caution due to its current valuation. Penske's EV/EBITDA and price-to-earnings (P/E) ratios stand at a premium compared to its group and are at the higher end of its historical range.
Penske Automotive has been active in share repurchases, buying back approximately 23% of its shares since 2019 and about 1% in the past year. It also offers the largest dividend yield within the Public 6 at 2.6% and has the most conservative leverage ratio at 1.0x EBITDA. Projections suggest that the company may reduce its share count by approximately 2% in 2024 and by about 3% in both 2025 and 2026.
The firm did not include potential acquisitions in its model for Penske due to the company's historically unpredictable acquisition pattern. However, it acknowledges Penske's capabilities as an acquirer and integrator.
Given Penske's low leverage ratio, the company has the capacity to create value through acquisitions or increased share repurchases if it opts to follow either strategy.
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