Penske's Q2 Is Another Record-Breaker

Penske Automotive Group had its best-ever quarter with diluted EPS of $4.93 (beating the Refinitiv consensus of $4.47) up 17% year over year despite a 1% decline in revenue. Sales rose by 2% on a constant currency basis and exchange also reduced EPS by $0.11. This headwind will remain for a while, in our view, given the rising U.S. interest-rate environment causing the dollar to strengthen against the British pound and the euro. We see the company in great shape with a very healthy balance sheet and the ability to keep generating cash for both share buybacks and acquisitions. We intend to raise our fair value estimate to about $113 from $109 on a lower share count, slightly higher average operating margin and top-line revenue growth over our forecast period than previously modeled, and the time value of money. Peer dealers AutoNation and Lithia have embraced having a captive finance arm, but CEO Roger Penske said a captive does not make sense for his company. Penske has a brand mix skewed heavily to premium brands (about 70% of retail automotive revenue), which do much more leasing than volume brands, so we understand his reluctance.