On Tuesday, CFRA adjusted its outlook on Penske Automotive Group (NYSE:PAG), raising the price target to $125 from $115 but keeping a Sell rating on the stock. The firm's revised 12-month target is based on a projected 2025 price-to-earnings (P/E) ratio of 8.4 times, which is below the company's 10-year average forward P/E of 10.1 times.
This adjustment follows Penske Automotive's first-quarter earnings report, which revealed earnings per share (EPS) of $3.21, a 26% decrease from $4.31 in the same quarter last year and below the consensus estimate of $3.33.
The company's earnings miss was attributed to weaker-than-expected profit margins, despite a slight 1.5% increase in revenue to $7.45 billion, which was $30 million below consensus forecasts.
Moreover, Penske's gross margin shrank by 40 basis points to 16.7%, which, while 50 basis points above consensus, still indicates a contraction. The firm has also revised its adjusted EPS estimates downward to $14.00 from $14.75 for 2024 and to $14.80 from $15.25 for 2025.
Penske Automotive saw a boost in its top line, driven by a 3.6% rise in auto sales volumes, though this was somewhat offset by lower price realizations. Notably, the Retail Commercial Truck segment, which accounted for 12% of total revenue in the first quarter, experienced higher gross margins. The CFRA maintains its Sell rating due to valuation concerns and the anticipated difficulty in year-over-year earnings comparisons.
Despite a trading premium relative to many U.S. auto dealership peers, CFRA views Penske Automotive as a lower-quality name. The company's significant international exposure, which constituted 40% of total revenue in 2023, is cited as a reason for maintaining a valuation discount.
InvestingPro Insights
In light of CFRA's recent assessment of Penske Automotive Group (NYSE:PAG), additional insights from InvestingPro could provide investors with a deeper understanding of the company's financial health and market position.
With a market capitalization of $10.32 billion and a P/E ratio that has adjusted to 9.46 in the last twelve months as of Q4 2023, Penske appears to be trading below the industry average, which may justify CFRA's valuation concerns.
InvestingPro Tips highlight that Penske Automotive has raised its dividend for 14 consecutive years, demonstrating a commitment to returning value to shareholders. This could be a point of interest for income-focused investors, especially considering the company's dividend yield of 2.24% as of the beginning of 2024.
Moreover, Penske is recognized as a prominent player in the Specialty Retail industry and has been profitable over the last twelve months, which aligns with analysts' predictions that the company will remain profitable this year.
Still, it is not all positive; five analysts have revised their earnings downwards for the upcoming period, and the company suffers from weak gross profit margins, as evidenced by the 16.71% margin in the last twelve months as of Q4 2023.
These factors may contribute to the Sell rating maintained by CFRA. For investors seeking a more comprehensive analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/PAG, and by using the coupon code PRONEWS24, users can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription.
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