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Penske Automotive Group Inc. Sets Sales Records As Slowdown Looms

By Demitri Kalogeropoulos – May 8, 2017 at 12:25PM

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Executives believe their diversified operating model will help the company perform well even if the industry contracts in 2017.

Auto retailer Penske Automotive (PAG 0.13%) in late April posted first-quarter earnings results that showed solid sales gains. To be sure, executives are keeping an eye on a slowing U.S. market for auto sales. But the company still sees plenty of opportunities ahead for revenue and profit growth.

More on that industry slowdown in a moment. First, here's how the headline results compared to the prior-year period: 

Metric 

Q1 2017 Actuals

Q1 2016 Actuals

Year-Over-Year Change

Revenue

$5.08 billion

$4.82 billion

5.3%

Net income

$83 million

$80 million

3.5%

EPS

$0.96

$0.90

6.7%

Data source: Penske's financial filings.

What happened this quarter?

Penske notched several records during the quarter, including sales and operating income, with a big assist from the recent acquisitions of stand-alone dealerships. Revenue at existing stores also contributed to gains as growth accelerated in its network of auto lots.

A customer is handed keys to his new car.

Image source: Getty Images.

Highlights of the quarter included:

  • Retail auto sales improved by 11% thanks to growth in the U.K. segment and in recently acquired dealerships. Same-store sales fell slightly, but revenue growth sped up to a 3.7% pace from a 2.8% pace in the prior quarter after accounting for foreign currency changes. 
  • Gross profit per new vehicle held flat at roughly $3,000, equating to a gross margin of 7.7% of sales.
  • Used car margin ticked up slightly to 6.1% of sales from 6%.
  • Financing posted an almost 10% jump in profit to over $1,174 per auto sale.
  • The services segment grew sales by 4% but increased gross profit by 5% to $294 million. That translates into just over 42% of Penske's total gross earnings even though the division comprises just 11% of the revenue base.
  • Operating profitability held steady at 3% of sales as a slight uptick in gross profit was offset by rising expenses.

What management had to say

CEO Roger Penske expressed confidence that the latest results are keeping the company on track to meet its financial goals. "Our diversified transportation services business delivered another outstanding quarter of record results despite foreign currency headwinds," Penske explained in a press release.

Executives highlighted the company's broadly improving operating metrics in the U.S. division even as its international segment expands at a healthy pace. Penske said:

I am pleased to see increases in average gross profit per transaction for new vehicles, used vehicles and finance and insurance when excluding the impact from foreign exchange, coupled with another strong quarter of record results by our U.K. business.

Looking forward

The pace of auto sales growth in the U.S. has declined in recent months, especially in the new car segment. That could help ensure that 2017 is the first down year for the industry since 2009. Thus, given last year's record demand, elevated inventory levels could hurt Penske and other retailers as rivals ramp up promotions to keep cars moving through the system.

On the other hand, this weakening environment should help demonstrate the power of Penske's diverse business model. After all, it boasts a $7 billion auto business in the U.K., significant revenue from the heavy-duty truck segment, and a truck leasing program that delivers healthy earnings and cash flow. As a result, while not immune from a prolonged slowdown in auto sales, Penske is well positioned to keep profits churning higher even if the U.S. industry takes a step backward in 2017.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Penske Automotive Group. The Motley Fool has a disclosure policy.

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