Penske Automotive Group: Raising Valuation Amid Prospects for a Good 2024

After rolling our Penske Automotive Group model forward one year for the 10-K filing, we are raising our fair value estimate to $142 from $130. The change is primarily from a lower share count and modeling faster inventory turnover, with both factors roughly equal in impact. We now model $300 million annually for share repurchases ($350 million in 2024) across years 2-5 of our explicit forecast period instead of $50 million per year in our prior model. This change is appropriate because the company has cumulatively spent over $1.5 billion on buybacks the past three years, and we expect future spending to be more like these recent levels rather than lower levels prior to the pandemic. Year-end 2023 share repurchase authorization was $215.5 million with no expiration. Our diluted share count for the valuation is now about 64.9 million, down from 67.7 million. The faster inventory turnover modeled is from our expectation of turnover slowing from recent artificially high levels caused by the chip shortage but turnover not falling all the way to prepandemic levels because we expect automakers to keep dealer inventories lower to maximize profit for them and to help dealers. The turnover increase change is only equal to about 0.3 times faster than our prior assumption.