Investors had modest expectations heading into Penske's (NYSE:PAG) fourth-quarter earnings report given the struggles the vehicle retailer had noted in recent quarters in major markets like the U.K. That challenge was compounded by the fact that new car sales were being pressured in the core U.S. segment.
Yet, while the company did post a rare annual adjusted earnings decline this week, the actual results were surprisingly strong and point to another record year ahead for 2020.
Let's take a closer look at its fourth-quarter earnings.
Sales gains and digital updates
Penske notched an 8% revenue increase to post a record $5.9 billion for the quarter. The gains were broad-based, with same-store retail revenue rising 6%. That increase was composed of modest volume growth in both the used and new car segments, plus robust gains on servicing and warranty and finance purchase. Penske also enjoyed a solid uptick in demand for its commercial truck services.
These gains pushed sales up higher than most investors expected despite sluggish demand for new cars in the U.S. through 2019. "I am very pleased with the performance of our business in the fourth quarter," CEO Roger Penske said in a press release.
Penske's finances posted even stronger improvements than revenue. Gross profit margin held steady at 15% of sales, but selling costs declined. As a result, operating income jumped 12% to $153 million. This translated into a modest 2% drop in adjusted operating earnings for the year. "The strength of our U.S. auto retail operations coupled with the recent commercial truck acquisition more than offset the challenging market conditions in the U.K.," Penske explained.
Like rival CarMax, Penske has identified online car shopping as a key growth trend for the next decade, and management cited important progress in that channel. The company said 40% of its unit sales can be traced back to digital sources in the quarter, in fact. Penske also noted high conversion rates for online shoppers as it progressed in adding more pieces of the car-buying experience to its online platform. The ability to complete the entire process without visiting a dealership is coming to the U.K. this year, executives said.
Penske doesn't issue short-term financial forecasts, but its long-term picture suggests investors can reasonably expect higher sales and faster earnings growth in 2020. Revenue has risen at a compound annual growth rate of 10% over the last decade, after all, as adjusted earnings rose by 16%.
The key drivers of this year's results will be the strength of the U.K. and U.S. markets, both in the new and used car segments. Another slump in one or both geographies might produce disappointing returns for the consumer discretionary stock in the short term.
However, Penske also has demonstrated this past year that its diverse operating model, which gets significant growth from its parts and servicing division and from its commercial truck segment, is strong enough to expand sales through a wide range of selling conditions.