Investors were pleased with the headline 2019 results from Penske Automotive Group (NYSE:PAG). Its latest earnings report showed broad improvements in its car sales volumes in the key markets of the U.S. and the U.K. The automotive retailer wrapped up a solid financial 2019 that, while showing a rare annual earnings decline, included positive steps in its strategy to diversify into used car sales.
In a conference call with Wall Street analysts, Penske executives provided more detail about the latest demand trends they're seeing. CEO Roger Penske and his team also commented on a few reasons investors might expect another record year for fiscal 2020.
Strength at the core
The good news is total automotive units retailed were up 2% on a same-store basis. New was up 1%, and same-store used [volume] was up 3%. We outperformed the market both in the U.S. and the U.K. during the quarter.
-- Roger Penske
Penske Automotive's core auto retailing business shined in the quarter, with comparable-store sales returning to positive territory after declining for most of 2019. The company credited an improvement in the U.S. new car industry for supporting that rebound. Its aggressive move into the used car market to compete against rivals like CarMax also worked out well. The company now sells a ratio of 28 used cars to every 100 new cars, up from 20 a year ago.
Its focus on premium vehicles paid off, too, with gross profit rising 6% to $3,500. CarMax's comparable figure is $2,400. Penske noted 4% higher payments on average by car buyers, after including higher sales prices and warranty and services packages. "I think our results continue to highlight our business and our diversification strategy," Penske said.
Today, we have over 58,000 vehicles online and ready for purchase. In the fourth quarter, over 40% of our new and used unit sales in the U.S. originated from digital sources for the first time. We saw an increase in traffic, an 18% increase in leads, and a 40% increase by customers engaging in our Google business listings.
The company is seeing many of the same positive signs that CarMax has described in the digital sales channel. Online shoppers are eager to complete as much of the purchase process as possible through digital channels and are converting into buyers at an attractive rate.
That shift carries risks, especially since Penske Automotive might see lower attach rates for its financing, warranty, and servicing contracts. But management believes digital sales are still worth pursuing aggressively, as demonstrated by its plan to put the entire car-buying process online in the U.K. this year.
A model that works
Our diversified model ... generates significant cash flow, providing us the opportunity to make acquisitions and return capital to shareholders.
One of the takeaways from the past year, according to management, is that its diverse selling model achieves significant profits from commercial trucking and retail auto servicing. In addition, Penske executives said 2019 demonstrated their ability and commitment to returning cash to shareholders. The company paid out just over $300 million in dividends and stock repurchases, translating into 70% of income. Given that profits have grown at 16% compound annual growth rate since 2010, that return figure is likely to continue climbing over the long term.