Over the past six months, Penske Automotive Group’s shares (currently trading at $160.42) have posted a disappointing 5.8% loss, well below the S&P 500’s 8.8% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Penske Automotive Group, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Penske Automotive Group Not Exciting?
Even with the cheaper entry price, we're cautious about Penske Automotive Group. Here are three reasons you should be careful with PAG and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Penske Automotive Group’s demand within its existing locations has been relatively stable over the last two years but was below most retailers. On average, the company’s same-store sales have grown by 1.4% per year.
2. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.
Penske Automotive Group has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 16.5% gross margin over the last two years. Said differently, Penske Automotive Group had to pay a chunky $83.50 to its suppliers for every $100 in revenue. 
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Penske Automotive Group, its EPS declined by 8.8% annually over the last three years while its revenue grew by 4.2%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Penske Automotive Group’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 11.9× forward P/E (or $160.42 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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