Stock Mart: UnitedAuto

If anyone can steer a drifting automotive company back onto the highway, Roger Penske can. Or at least that's what investors in UnitedAuto (UAG) are betting.

The car-racing and auto-business magnate joined UnitedAuto, operator of 66 new and used car dealerships around the country, in April as chairman. At the time, UnitedAuto's shares had dipped into single digits, a far cry from the $30 they fetched when founder Marshall Cogan's enterprise came public in 1996. But since Penske came on board the stock has regained a healthy 30%, easily outperforming a largely flat broader market.

"The initial pop on the stock really has been a vote of confidence for Penske," says Mark Williams, co-manager of the Principal (PLLAX)Small-Cap fund, a UnitedAuto shareholder.

Penske Capital Group, formed in 1997 with Chase Capital Partners, agreed in April to take a 27% stake in UnitedAuto in exchange for $83 million. (The stake could rise to 38% upon exercise of warrants.) The funds will help pay down debt, fund acquisitions and provide working capital at the nation's second-largest auto retailer, after AutoNation (AN). Cogan, the former chairman, retains a 13% stake.

Three-Point Turn UnitedAuto shares rise upon Penske's arrival

Source: BigCharts

"I think you can't overemphasize the reputation of Roger Penske," says Williams, who has been adding to the 63,000 UnitedAuto shares his fund owned as of March 31, according to Technimetrics. "Before Roger came on the scene, UnitedAuto was getting wrapped up in the financial problems Marshall Cogan was having, and shares were being discounted."

Indeed, UnitedAuto's stock drooped as low as 5 3/4 in February as the mounting debt burden at Cogan's Trace International -- its loans were tied to Cogan's shares in UnitedAuto and polyurethane concern Foamex International (FMXI) -- took an increasingly heavy toll on the company. Investors were also dissatisfied with UnitedAuto's repeated earnings shortfalls: A fourth-quarter charge to close a subsidiary came in at $20.7 million -- more than analysts expected. UnitedAuto also took a $12.6 million fourth-quarter charge to find a new insurance carrier when Trace said it couldn't meet obligations for the UnitedAuto insurance and warranty-service contracts it had taken on.

Penske, meanwhile, had earned a sterling reputation as his fledgling business empire blossomed. He started from scratch, beginning with a car dealership he bought in 1965 after a successful car-racing career. In the 1980s, he bought struggling Detroit Diesel (DDC) from General Motors (GM) and grew it into a $550 million company with over $1 billion in sales in the first six months of this year. And just last month, Daytona Beach, Fla.-based International Speedway (ISCA) acquired his Penske Motorsports in a deal valued at around $700 million, or $45 per share, in cash, stock and debt. Penske had brought the concern public in 1996 at 24.

Now, UnitedAuto shares are benefiting from Penske's reputation -- and from his hard-charging management style, which has brought change aplenty to the company.

Among Penske's first changes was to expand the board to nine directors from seven, adding more auto industry know-how and a general partner from Chase Capital. Then he arranged a billion-dollar financing agreement with Chrysler Credit, a division of DaimlerChrysler (DCX). The deal set up a new $250 million credit facility, with the remaining $750 million to be used for vehicle financing.

Next, Penske raided his own empire for upper-management talent, bringing in executives from Penske Corp. and Penske Truck Leasing. And smaller fixed-cost savings are already in place. For example, insurance expense savings will total about $1 million annually and headcount reductions will save over $2 million annually, analysts say.

Doubling its appeal with thrifty investors, UnitedAuto is also attractive by value standards. It boasts a price-to-sales ratio of 0.08 -- value investors typically seek stocks with ratios under 1 -- and its trailing price-to-earnings ratio is 18, well below the S&P 500's recent multiple of 29.

Analysts approve. Last week Tom Thomson at First Union Capital Markets in Richmond, Va., upped his estimates and target price and reiterated his buy rating. He raised his 12-month price target to 19 from 16. His 2000 earnings estimate rose to $1.20 from $1.05. The First Call consensus estimate is $1.19. First Union hasn't underwritten for UnitedAuto.

"This is essentially a new company, with a largely invigorated management team and staff in the dealerships that is quickly adopting the 'Penske culture,'" Thomson wrote last week. Annual revenue could eventually approach the $6 billion mark from its current $4 billion run rate, he says. Revenue for the latest 12 months totaled $3.68 billion.

For its second quarter ended June 30, UnitedAuto reported that earnings rose to $8.6 million from $8.2 million a year earlier, though earnings per share slipped to 35 cents in the latest period from 40 cents a year earlier as a result of a rise in shares outstanding. Revenue jumped 16% to $1.04 billion from $896 million a year ago.

To be sure, the changes instituted by Penske do not make UnitedAuto a bulletproof investment. While sales have boomed lately in a strong economy, the car business is always cyclical, dependent on continued economic growth and low, stable interest rates.

Still, judging by Penske's auto-industry accomplishments to date, eventually UnitedAuto will be one more Penske success story.

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