Penske's Falling Knife

Penske (PAG) reported Q4 results which show clear improvement on a YOY basis. They have exhausted their last share and debt buy back program and claim no share buy backs in Q4. They also claim to be repurchasing a convertible issue with a 3.5% coupon due 2026. They have new authority to buy more shares and debt. $150 million to be specific.

Penske used to pay a dividend. There will be eventual pressure to re-establish the dividend as profits re-establish themselves. This will drive the stock upwards which makes the convertible story more compelling. Penske is trying to catch a falling knife. They want to buy back as much of the convertible as they can before the dilution becomes a reality.

The new buyback approval is huge when contrasted against Q4 net income of $18.7 million. Management says they will use cash flow and borrowings to achieve the buy backs. The good news is only $262 million of the convertibles are left. The bad news is the short term focus is on balance sheet, balance sheet, balance sheet.