Roger Penske is an auto-industry legend. He's 78 years old now, but he has been involved in the car business in various ways ever since began his career buying and selling (and driving) racing cars in the late 1950s.
Penske is still very much involved in racing as a team owner, but over the years his family of vehicle-related businesses has expanded considerably. His holding company, Penske Corporation, owns or holds controlling interests in several businesses that stem from Penske's lifelong interest in cars and trucks.
Those companies include Team Penske, a major auto-racing operation that fields teams in the IndyCar series as well as several NASCAR series. There's also Penske Truck Leasing, a joint venture between Penske and General Electric that rents and leases those familiar yellow trucks.
And perhaps of most interest to us, Penske Corporation owns 40% of, and controls, Penske Automotive Group (NYSE:PAG). Let's take a closer look at that one.
Roger Penske pioneered the idea of a "megadealer"
Roger Penske was a pioneer of the concept of a "megadealer," a corporation owning a large number of new-car dealerships. Contrary to the public's general impression, new-car dealers often have very thin profit margins, but an owner that has a lot of dealerships can realize efficiencies from economies of scale around marketing and back-office operations and so forth. That boosts profits.
And the profits have been quite good recently at Penske Automotive Group ("PAG"). It's the world's second-largest new-car dealership group in terms of revenue, with 197 U.S. dealerships (and about 150 more overseas, mostly in the United Kingdom). Only industry leader AutoNation (NYSE:AN) owns more U.S. dealerships and generates more revenue.
Last year, Penske Automotive Group earned $295.7 million, or $3.27 per share, on revenue of $17.2 billion. It sold 216,462 new cars and another 181,894 used ones, according to figures compiled by Automotive News. That was the most profitable year in the company's history, with revenue and income both up 18.9% over 2013 totals.
As a group, megadealers are an intriguing investment. There are still lots and lots of independent new-car dealers, which means lots of opportunities for the big groups to continue to expand via sensibly priced acquisitions as opportunities allow. Just ask Warren Buffett -- Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) recently acquired the Van Tuyl Group, fourth-largest of the U.S. dealer groups in terms of revenue, and Buffett sees plenty of opportunities for its expansion.
PAG's stock price has been trading around $51 recently. That gives it a price-to-earnings ratio of around 15.7, below the industry average and cheaper than both AutoNation and Group 1 Automotive (NYSE:GPI), the third-place group.
Wall Street seems to think that PAG's prospects for growth are more subdued than those of its two biggest rivals. But I think PAG has an interesting wrinkle that makes it worth a closer look.
Why Roger Penske's auto-dealer group could see big growth
Penske and other PAG executives often say that the group has "best in class brand mix": 72% of its dealership revenues came from "premium"-brand dealers, while just 4% came from dealerships representing the Detroit automakers. (In contrast, AutoNation generated just 46% of its 2014 dealership revenue from premium luxury, and 33% from Detroit-brand dealers.)
In fact, as you can see from this slide from PAG's 2014 year-end earnings presentation, over a quarter of its revenue came from stores selling BMWs (OTC:BAMXF) BMW and Mini brands.
Why is that important? Because luxury-car sales have continued to show solid growth, even as sales of mainstream brands have started to level off, and prospects for their growth look strong for the next several years.
Through April, U.S. sales of BMW and Mini were together up 11.8%, outpacing the market's 5.4% rise. It's a similar story at BMW's German rivals Audi (up 11.9%) and Mercedes-Benz (up 9.6%).
A cyclical business worth watching
Like all auto-related businesses, PAG's business is a cyclical one. Its margins may come under pressure as the U.S. new-car market -- which is probably at or near its peak now -- levels off and eventually softens.
Some signs of that might have started to become visible in the first quarter, when retail sales of new cars were up 6.6% -- but revenue from new-vehicle sales grew just 4.1%. That could suggest that dealers are having to be a bit more aggressive with discounts to win sales, which could be a sign that the market is weakening.
But this is a well-run company with better-than-average exposure to the richest corner of the new-vehicle market. Keep an eye on this one.