The Consumer Discretionary sector cuts a wide swath across the economic landscape of the United States. It’s easy to think about the sector as the place you’ll find retail stocks, but the truth is that there are a lot of other businesses within the sector that are much more than just the department stores and restaurant chains that you might normally think about.
Within the sector, there is an industry called Specialty Retail, and this industry is the category where you’ll often find retail businesses and stores that each have a unique, specific focus; the interesting thing about the industry is the wide range of business types you’ll find. Think Best Buy (BBY), Home Depot (HD), and Tailored Brands (TLRD), to name just a few, and you start to get an idea about the wide swatch of business types the industry covers.
Penske Automotive Group Inc (PAG) is a company in the Specialty Retail industry that you’ve probably heard of, but wouldn’t naturally think of as a retail stock. It isn’t all that unusual to see a Penske moving truck moving along any of America’s highways, so this is a stock with immediate name-brand recognition and a large international footprint in their specific niche. Like most stocks in the market, PAG took a beating in the latter part of 2018, falling from about $54 per share a low around $38.50. It rebounded strongly throughout January, hitting a rally high at about $48 before dropping sharply back again at the end of the first week of February.
PAG is a stock that is currently about 20% below its 2018 high, which means it remains in bear market territory; however it is also forming a new short-term upward trend, which could mean there is a useful opportunity to be had right now. It also carries a value proposition that, taken alone, might tempt you to think about taking a position in a stock that includes a high dividend yield to boot. Be careful, though; there may be some fundamental issues that could point to a higher than normal level of downside risk that even the stock’s currently discounted price doesn’t justify.
Fundamental and Value Profile
Penske Automotive Group, Inc. is an international transportation services company. The Company operates automotive and commercial truck dealerships principally in the United States, Canada and Western Europe, and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services principally in Australia and New Zealand. The Company’s segments include Retail Automotive, consisting of its retail automotive dealership operations; Retail Commercial Truck, consisting of its retail commercial truck dealership operations in the United States and Canada; Other, consisting of its commercial vehicle and power systems distribution operations and other non-automotive consolidated operations, and Non-Automotive Investments, consisting of its equity method investments in non-automotive operations. The Company holds interests in Penske Truck Leasing Co., L.P. (PTL), a provider of transportation services and supply chain management. PAG’s current market cap is $3.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased almost 10%, while revenues were most flat, rising only .77%. The pattern turned negative in the last quarter, with earnings declining nearly -21% and sales dropping almost -4%. The company operates with a very narrow margin profile that is becoming even more so; Net Income was 2.06% of Revenues over the last twelve months, but narrowed to only 1.8% in the most recent quarter. With a margin profile so thin, there isn’t a lot of room to lose and still maintain a healthy balance sheet, so this should be a pretty big red flag.
Free Cash Flow: PAG’s free cash flow appears strong, at more than $469 million. That translates to a Free Cash Flow Yield of 12.8%, which is normally very attractive; however as you’ll see next, this positive data point appears to be the exception to a generally negative financial picture.
Debt to Equity: PAG has a debt/equity ratio of .81. This is a conservative number that generally suggests debt management shouldn’t be a problem; however the balance sheet that PAG’s cash and liquid assets were only $37.6 million in the last quarter versus $2.1 billion of long-term debt.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for PAG is $31.05 per share, and which translates to a Price/Book ratio of 1.39. Their average Price/Book Value ratio is 2.12, which means the stock is quite undervalued, with about 34% upside potential at its current price. That notion is bolstered by the fact the stock is also trading about 35% below its historical Price/Cash Flow average. Together, those figures offer a long-term target price at around $66 per share. That looks very impressive; but when you consider the company’s deteriorating Net Income and over-leveraged balance sheet, you have to question the stock’s ability to drive anywhere near that price in the long-term.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: Despite the stock’s large (a little over 10%) drop in the last week from about $48 to its current level around $43, the stock does appear to be showing some resilience, having just bounced off of support at around $42 per share. In order to offer any kind of useful short-term upward potential, however the stock would have to break above that pivot high at $48 per share; until that happens, any kind of short-term bullish forecast is simply unjustifiable. If the stock breaks below its current support at $42, a retest of the 52-week low around $38.50 could be just around the corner, with the next likely level of significant support at around $34 from levels last seen in 2016.
Near-term Keys: No matter what the value-based numbers say, this is a stock that doesn’t really have any kind of really useful trade set up right now. The closest possibly is a bearish trade; if the stock drops below $42, consider shorting the stock or working with put options. There is no good bullish momentum trade until the stock manages to break above $48 per share. As you’ve surely notice I’m also skeptical of the value proposition the stock offers right now. In my book, PAG is a perfect example of a value trap. Until the company shows significant improvement in its Net Income and its balance sheet, I just don’t think any kind of long-term position is justified.