Penske Automotive Group Inc. Sales Rise 10% Despite Weak Demand for New Automobiles

Demand for new automobiles has slowed in recent quarters, but investors have seen Penske Automotive (PAG 0.01%) lean on its diverse business lines to keep its sales and profits churning higher. Those generally positive trends continued in the fiscal quarter that just closed, as Penske overcame weakness in new car sales volumes with solid gains in its used car, truck leasing, and services and parts divisions.

Here's how the headline results compared to prior-year period:

Data source: Penske's financial filings.

What happened with Penske Automotive Group this quarter?

Penske's sales volume slowed for the fourth consecutive quarter but higher sales prices on used vehicles and increased service and parts demand picked up that slack.

A few key highlights of the quarter:

• Volume growth for new and used cars dropped to below 2% compared to 6% last quarter and 7% in the fourth quarter. That figure was composed of flat new car sales and a 3.1% uptick in the number of used cars sold.
• Same-store sales growth sped up to 8.8% thanks to several positive trends, including higher prices on new and used cars, increased services and parts sales, and 9.7% growth in Penske's financing and insurance arm.
• Penske booked a 45.5% spike in its U.S. commercial truck business, generating $338.8 million in revenue. 
• Gross profit per vehicle stopped at $3,127, or 7.5% of the sale price, for new vehicles and $1,574, or 5.8% of the sale price, for used cars. Both margins were roughly even with the prior-year period.
• Overall gross profit margin held steady at 15% of sales and operating margin was unchanged at 21% of sales.
• The tax rate plummeted to 23% of sales from 32%, which contributed to a 27% increase in net income. Stock repurchases lifted that increase to a 29% rate on a per-share basis.

What management had to say

Executives noted that Penske's diverse operating approach made the difference during the quarter. "Our business produced outstanding results, demonstrating the strength of our diversified transportation services model," CEO Roger Penske said in a press release. Management also highlighted the progress they made targeting the fragmented, but huge, used car market. "I am particularly pleased with the performance of the stand-alone used vehicle supercenter operations which retailed 18,832 vehicles, generated $346.7 million in revenue, and returned over 4.3% on sales during the quarter," Penske said.

Looking forward

Penske has a few expansion avenues available that can help it offset a new car niche that's approaching flat growth, including a deeper push into the used car market and a focus on the services and parts segment that powers the majority of its profits.

Its digital sales channel should also be an important asset going forward, because the retailer's size and national footprint make it easier to market automobiles online. Executives said approximately one-third of U.S. sales are already attributed to its e-commerce initiatives and, because online shoppers convert at a rate that's three times that of a typical lead, investors can expect Penske to direct plenty of resources toward building up that digital infrastructure over the coming quarters.