Penske Automotive Group (NYSE: PAG)
, which operates automotive and commercial truck dealerships, released its Q2 earnings yesterday before the bell. Early in the session, shares dipped a little over 2%, but they quickly rebounded, closing up more than 2.5%.
Two weeks ago, the company pre-announced expectations for a surprise Q2 profit. Penske expected earnings to come in between 52 and 57 cents per share, blowing away the FactSet consensus for a loss of 16 cents a share.
Yesterday, Penske announced Q2 EPS of 56 cents a share, coming in at the high-end of the 52-57 cent range. After struggling mightily in April and May, Penske’s huge improvement in June offers optimism for the rest of 2020.
A V-Shaped Recovery
Penske’s 2020 was off to a strong start prior to the onset of the pandemic. Through the first two months of the year, same-store unit sales were up 3.4% yoy. But business started to take a turn for the worse in mid-March, leading into rough performances in April and May.
In April, total same-store units were down 71% yoy and fixed operations growth dipped 64% yoy. May was a little better, but units were still down a staggering 50% yoy and fixed growth decreased 46% yoy.
On the earnings call, CEO Roger S. Penske said, “During April and May, our operations in the U.K., Italy, and our CarSense supercenter locations in Pennsylvania were completely closed. Operations in Northeast U.S. and portions of California were significantly reduced.”
But in June, Penske was able to re-open many of its physical locations. The re-openings, coupled with some pent-up demand, caused revenue to recover, with total June 2020 revenue down just 1% compared to June 2019.
Even factoring in the June recovery, Penske had a tough quarter. But the company’s cost-cutting measures helped it to stay afloat.
Furloughing Employees Decreased SG&A Expense
Soon after the onset of the pandemic, Penske began furloughing around 15,000 employees, which is more than half of its workforce. While the company is now returning some of those employees to active status, 14% of Penske’s employees are still on furlough as of July 1.
On the call, Roger Penske talked about the furloughs and how they contributed to strong cash flow over the first six months of 2020:
“We reduced SG&A expenses by $215 million in the quarter, highlighted by SG&A to gross profit that was approximately 64% in June this year compared to 72% last June. And in the quarter, we focused on liquidity and preserving cash. In fact, our cash flow is very strong. As of June 30, 2020, we had $1.2 billion in liquidity, $150 million in cash and over $1 billion of availability through our revolving credit facilities. Both the U.S. and U.K. revolvers were fully available at the end of June. During the first six months of this year, we generated $474 million of cash flow and free cash flow was $428 million.”
Penske Shares Are a Superb Value
Despite the April and May weakness, June’s results show that Penske is positioned for a solid second-half of 2020.
PAG is trading at just 12.5x projected 2020 earnings and around 9x projected 2021 earnings. And we’re not talking about some struggling company that is on its way to the junkyard; Penske’s revenue and net income have both grow at CAGRs of a little over 5% over the past five years.
So Where Can You Get In?
Even though PAG looks like an excellent value at current levels, shares are currently in no-man’s land. They are a bit extended from the breakout of a recent month-long base, as well as the 50-day and 200-day moving averages.
And at around $48 a share, PAG faces a lot of resistance in the low $50’s; shares have failed to break above that area several times over the past 5+ years.
While PAG looks like a fantastic value at $48, getting in here would make me queasy. You have a couple of better options:
- The ideal scenario is that PAG moves up to the $50-55 range, consolidates for 2-3 weeks, and then decisively breaks out above $55.
- You could look for a pullback to the low to mid $40s. This would take PAG close to the recent (small scale) breakout. Additionally, the 50-day should soon cross over the 200-day in that range, which would be another technical tailwind.
The Final Word
It’s tough to sit and wait on a company that is such an attractive value – like Penske – but that’s the best move in a situation like this. Keep an eye on PAG going forward though. Once the chart gives you the go-ahead, this is a company you want to get into.
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