KeyBanc Downgrades Penske Auto, Cites UK Exposure

KeyBanc analysts downgraded the shares of Penske Automotive Group, Inc. PAG to Sector Weight from Overweight citing more downside risk than upside potential including the exposure of Britain.

As a result, the brokerage slashed its earnings forecast by 10 percent for the fiscal year 2017 citing a possible slowdown in car sales in the Great Britain apart from the Brexit decision, which would lead to forex headwinds. Aside from these, Penske Automobile would have to spend more on interest costs due to its recently completed debt offering.

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The analysts see the continuation of multiple discounts in the mid-term following the uncertain outlook from the Britain as the revenue mix was as much as 35 percent. They expect 5 percent earnings reduction from a possible fall in new car sales until the next year.

"Our volume decline estimate of 8% through 2017 is somewhat less pessimistic than LMC's revised outlook of down 15% by 2018 (provider of automotive sales outlook) as we believe the potential headwinds will be partially offset by existing expiring lease contracts on company cars, which will need to be replaced, as well as a potential step up in OEM incentives to partially offset the negative impact of currency depreciation on vehicle affordability," the analysts said in a research note.

Similarly, the brokerage expects forex headwinds to impact earnings by $0.15 in 2017, while $0.10 is expected to be impacted by increased interest costs.