Penske Automotive (PAG +0.88%) announced earnings results this week that underlined the strength of its approach to selling automobiles and related parts and services. While sales volume growth slowed, the company kept overall revenue and profitability churning higher thanks to positive contributions from the financing and services divisions.
Here's how the headline results compared to the prior year:
|
Metric |
Q4 2017 |
Q4 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$5.4 billion |
$4.9 billion |
10.4% |
|
Net income |
$330 million |
$83 million |
300% |
|
Earnings per share |
$3.85 |
$0.97 |
297% |
Data source: Penske's SEC filings.
What happened this quarter?
Although Penske's sales volume growth slipped, improving results from other areas of the business more than made up for that decline.
Image source: Getty Images.
A few key highlights of the quarter:
- Penske's volume growth decelerated for the third straight quarter, as it sold 7% more new and used automobiles, compared to 10% last quarter and 13% in the fiscal second quarter.
- The sales mix shifted toward Penske's U.K. market as recent acquisitions in that region allowed revenue to rise to 30.3% of the business from 28.8% a year ago.
- Revenue ticked up by a similar 2% rate in both the used and new car segments while demand for financing and services expanded at a faster pace. Overall, same-store revenue rose 2.6% to reverse the 2.9% decline last quarter.
- Profitability held steady on new vehicles, dipped slightly for used car sales, and rose significantly in both the financing and services segments. Gross profit per new automobile rose by $165 to $3,153 while used car profit fell $182 to $1,290.
- Overall, operating margin ticked down to 2.5% of sales from 2.6% a year ago.
- Tax benefits allowed net income to rise by 300%, but profit growth was still solid after accounting for that tailwind. Adjusted earnings per share jumped 11% to $1.01.
What management had to say
Executives highlighted the various operating wins that combined to push sales to new highs. "Our business produced another quarter of record performance," board chairman Roger Penske said in a press release, "driven by the U.S. retail automotive operations along with a 180 basis point increase in service and parts gross margin, a robust commercial truck business, our growing stand-alone used vehicle supercenter operations, and our investment in Penske Truck Leasing."
Looking ahead, Penske said management is "excited about the growth prospects across our enterprise," especially in light of tax law changes that will help fund greater investments into the business.
Looking forward
Penske recently made progress on its plan to diversify away from the U.S. market as it acquired U.K. dealership network The Car People. This buyout brings a further $300 million of annual sales to the business, starting in 2018.
In addition to the international expansion, investors can expect to see Penske push deeper into the used car market, which offers a counterpoint against softening new-car sales. That industry niche is about three times as large as the one for new cars, too, which means there's plenty of room for growth ahead.
Finally, look for the retailer to announce changes to its capital allocation plans in the coming months, due to the windfall provided by tax law changes. Penske already increased retirement benefits for employees, but the reduced tax liabilities are large enough to also fund greater investments in the business and direct shareholder returns like increased stock repurchase spending.
