Penske Automotive Group Inc PAG

We Expect Continued Dividend Growth From Penske

Penske Automotive Group receives over 90% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm's operating margin tends to be on the lower end of the publicly traded dealers. Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business—a 100% gross margin business—as its peers because more of its customers lease vehicles or pay cash. The firm leases nearly all its real estate, so when excluding rent, Penske's SG&A ratio is competitive.