8. Penske Automotive Group, Inc. (NYSE:PAG)
Number of Hedge Fund Holders: 29
Penske Automotive Group, Inc. (NYSE:PAG) is an international company that focuses on transportation services, particularly in the automotive sector. It operates numerous car dealerships across various countries, including the United States, the United Kingdom, Canada, Germany, Italy, and Japan. It is also known as one of the largest retailers of commercial trucks in North America, specifically for Freightliner trucks.
The company differentiates itself from its competitors on the back of diverse operations in multiple geographic locations and retail automotive brand mix, where it generates 72% of its revenue from premium brands. During the fiscal third quarter of 2024, Penske Automotive Group, Inc. (NYSE:PAG) generated $7.6 billion in revenue, up 2% year-over-year. The company faced challenges in its Retail Automotive Dealerships segment with used vehicle sales declining by 13%, partly due to fewer trade-ins and lower availability from previous years. However, sales of new vehicles increased by 5% during the same time.
Management has been capitalizing on its stronghold over premium brands. On December 2nd, the company announced the acquisition of Porsche Centre Melbourne. The acquisition marks the third Porsche location in Melbourne and the 25th Porsche dealership worldwide for the company. Management expects this will bring $130 million in estimated annualized revenue taking its estimated annualized revenue from three dealerships in Melbourne to $260 million. It is one of the best auto and truck dealership stocks to invest in.
Black Bear Value Partners stated the following regarding Penske Automotive Group, Inc. (NYSE:PAG) in its first quarter 2024 investor letter:
“We have owned AutoNation and Penske Automotive Group, Inc. (NYSE:PAG) in the past but decided to consolidate our auto dealer investments solely into Asbury Automotive (ABG). AutoNation had gone thought a management transition and I wanted to see how the new team managed the business. They have done an excellent job and exceeded my expectations when it comes to capital allocation. As the stock looked very cheap, they bought 62% of the company coming out of COVID. As far as Penske is concerned, I think I made a mistake selling it as I undervalued a “hidden” asset in the Company that became more obvious over time. Asbury has taken on acquisitions and while the Company has done a good job, I would prefer to see how they manage the integration from the sidelines. We appreciate their stewardship and would consider buying back the stock later.
Penske is unique in that in addition to their domestic car dealerships they also own: auto dealerships in the UK, leading truck dealerships in the US, and ~29% of Penske Truck Solutions (PTS) a logistics/truck rental business (aka “the hidden asset”). The truck dealerships have always captured my attention as Parts/Service are an even larger chunk of the business than in autos (65-70% of profits for trucks). This is a very sticky, high-margin business that would trade at far higher multiples as a standalone entity. For accounting reasons, PTS is accounted for using the equity method which means their share of income comes below the operating income line and is often ignored or misvalued. Their share of PTS is conservatively worth $2.5-$3.5BB or 22-32% of the market cap of the entire company. The quality of PAG is not properly reflected in the share price. Management owns a lot of stock and seems to agree as the Company has bought back 17% of the Company in the last 2 years at attractive prices.”
