Friday, April 30, 2010

Penske Desperate To Avoid Dilution

Penske (PAG) engineered it’s balance sheet with this comment “The Company repurchased $71.1 million principal amount of its 3.5% Senior Subordinated Convertible Notes due 2026 in open market transactions for $71.7 million in cash during the first quarter, leaving approximately $235 million principal amount of these securities outstanding.”

This is over 300% of net income available for shareholders. Penske is a capital intensive business. Trucks and cars not to mention the parts inventory need financing. They have a 48% debt to equity ratio. Buying the sub notes at par is preplexing. They claim an open market transaction. The market in a $300 million issue is thin. I think someone had lunch with someone , went back to the office and made phone calls.

Sure there is a small avoidance of dilution. But overall cash is being deployed for desperate reasons not shrewd and savvy reasons.

Disclosure: No position in this stock