Penske Automotive Group Inc. Grows Despite New-Vehicle Sales Challenges

Global used- and new-vehicle retailer Penske Automotive (PAG 0.01%) recently announced third-quarter results that showed off the strength of its diversified selling approach. The company overcame weak volumes in its new-car retailing segment with help from higher profitability and surging demand in its heavy-duty truck division.

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

Data source: Penske's financial filings. 

What happened this quarter?

Penske's same-store unit sales dropped into negative territory as demand for new cars remained soft and as the company struggled through a temporary inventory shortage. The chain still managed to post record profits thanks to a mix of higher pricing, increased service and parts revenue, and booming demand for its commercial trucks.

A few key highlights of the quarter: 

• The number of used- and new-vehicle sales declined 2% compared to a 2% uptick in the prior quarter, marking the fifth consecutive quarter of reduced volume. However, the drop was mostly caused by a temporary inventory shortage of new vehicles, executives explained in a conference call with investors. Penske's used-car business continued to grow, with unit sales rising 2% in the period.
• Same-store sales turned flat, which was a sharp slowdown compared to last quarter's 9% boost. That dip was mainly due to the new-car inventory shortage, though, as the chain reported significant growth in its used vehicles, financing, and the services and parts segments.
• Gross profit per vehicle rose across the board and reached $3,470 overall, up from $3,339 a year ago.
• Its U.S. commercial truck business expanded by 25% thanks to a healthy economy that spurred demand for freight vehicles.
• Operating income rose to $164 million, or 2.9% of sales, from $152 million, or 2.8% of sales, last year.
• Net income jumped 38% as tax expenses plummeted.
• Penske held off on stock repurchases this quarter but has spent $56 million so far this year on buybacks.

What management had to say

Executives were happy with the broad-based gains the company managed over the summer months. "I am particularly pleased to report another quarter of record revenues, income from continuing operations and earnings per share," CEO Roger Penske said in a press release.

The results "demonstrate the benefit provided by [our] diversified transportation service model [and show] that the business is much more than just a monthly new vehicle sales business," Penske explained in the conference call.

Looking forward

Penske sees a few reasons to be optimistic about growth ahead as a strong U.S. economy supports demand for its premium and luxury consumer vehicle brands including BMW, Porsche, and Mercedes-Benz. The trucking segment also has a bright outlook over the coming quarters, and executives believe their e-commerce capabilities could help drive a 25% increase in used-car sales volumes over the next few years.

In the meantime, Penske's finances look strong due to the combination of lower debt levels, higher operating profits, and reduced taxes. These trends are giving management plenty of funds to reinvest in the business while also sending more cash to shareholders through a dividend payment that was recently raised for the 30th consecutive year.