Underperform - Price 14.65 on June 9
by Raymond James

Penske [intends to buy from General Motors] the Saturn brand and the distribution of Saturn cars and [original-equipment-manufacturer] parts. Penske is not buying manufacturing or retail. The retail network will remain with the current franchise operators. GM will continue to manufacture Saturn vehicles for at least two years. Penske will have the ability to develop source product from other global manufacturers, a process that will take at least two years. We have no visibility on purchase price. However, media reports of a $200 million price could make this an attractive opportunity for Penske. New-vehicle volume, the share of parts in the overall business mix, and the ownership structure are just a few of the key questions that remain unanswered at this time...the capital and ownership structure will [likely] include a direct investment from Chief Executive Officer Roger Penske and perhaps others. The structure and the accounting treatment are still unknown....There are several attractive elements: low fixed investment [costs] beyond the purchase price; minimal working-capital requirements; significant (but still undefined) volume in the high-margin parts-distribution business; and the ability to source product globally, which may allow some offshore manufacturers to enter the U.S. market without the expense of creating a distribution network. We maintain our Underperform rating, and note that the current price is about 17 times our FY10 EPS estimate of 67 cents, plus the pro-forma earnings generated by our Saturn base case at 75,000 units. Market cap: $1.34 billion.

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