Penske Automotive Group Inc..PAG

Auto dealerships are stable, profitable businesses with a diversified stream of earnings coming from parts, service, and used cars.

Parts and service revenue should continue to be lucrative over time because most manufacturers require warranty work to be done at the dealership, and large dealers can more easily afford the technology and training needed to service increasingly more complex vehicles.

Penske is well-suited to acquire dealerships because automakers often require an expensive facility upgrade to approve sale of a dealership. Many smaller independent dealerships cannot afford this upgrade.

Penske is the only auto dealer to achieve a large amount of revenue diversification outside the U.S. The firm's 2002 acquisition of large U.K. dealer Sytner Group brought in $4.1 billion of revenue in 2008, up from $2.7 billion in 2005, and Sytner was recently named Dealer Group of the year in the U.K. by Motor Trader Magazine. Read more 

As publicly traded dealers command greater share in some markets, manufacturers may refuse to approve transfers of franchise rights at some dealerships, limiting acquisition-based growth.

New-vehicle sales in the U.S. will decline significantly this year even for the premium and foreign brands that dominate Penske's dealership ranks.

It is uncertain whether consumers will demand luxury vehicles post-recession as they have in the past. Leasing and credit may be more difficult than it was prior to the recession. Read more