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Used Cars Are a Bright Spot for Penske Automotive

Demitrios Kalogeropoulos, The Motley Fool

Penske Automotive's (NYSE: PAG) business benefits from global operations and revenue streams that include the sale of new cars, used cars, and commercial trucks, along with servicing and financing offerings for all of these vehicles. That diversity has in the past helped the company keep setting profit records even as discrete divisions struggled.

Investors saw those same trends play out in the fiscal quarter that just closed, with growth in the used car business offsetting stubborn weakness on the new car side.

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

 Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Revenue

$5.4 billion

$5.4 billion

0.8%

Net income

$97 million

$329 million

(71%)

EPS

$1.16

$3.85

(70%)

Data source: Penske's financial filings. 

What happened this quarter?

Penske's sales volume shrank for a second straight quarter as slumping new vehicle sales were only partially offset by gains in the used car, financing, and servicing divisions. The dealership's profitability dipped slightly on a per-car basis but rose overall thanks to expense discipline.

A car salesman hands the keys to a customer.

Image source: Getty Images.

A few key highlights of the quarter:

  • The volume of vehicle sales fell 2% as a 7% drop in new car sales overwhelmed a 3% uptick in the used car business. The new car weakness was a slight surprise, given that management had blamed temporary inventory issues for similar challenges back in late October.
  • Same-store sales fell into negative territory to mark the second straight quarter of decelerating results. That metric was flat last quarter and expanded by 9% in the fiscal second quarter.
  • Gross profit per vehicle ticked up for used cars but fell 5% in the new car segment in another indication of worsening demand trends.
  • Lower expenses helped operating income hold steady at $136 million, or 2.5% of sales.
  • Penske booked a significant one-time tax benefit in the prior year, which explains why reported profit cratered by 70%. After accounting for temporary charges, adjusted earnings rose 10%.

What management had to say

Executives focused their comments on the wider 2018 performance that included operating wins for the company such as record revenue and sales volumes and a 23% spike in adjusted profits. "2018 was the best year in the history of Penske Automotive Group," CEO Roger Penske said in a press release.

As for the fourth quarter, management credited wins in the used car business and in the company's commercial truck operation for supporting overall growth that nonetheless fell below expectations. "Product availability in Western Europe of certain brands...impacted our performance during the quarter," Penske was quoted as saying.

Looking forward

Penske's weakening new vehicle segment implies that the company might struggle in 2019 to match the 3% overall sales volume increase, or the 3% boost in same-store sales, that it notched last year. However, the latest results demonstrate that the business can generate healthy profits even during periods of modest industry contraction. After all, operating earnings rose 10% over the past year to significantly outpace the company's reported 6.5% revenue increase.

Executives don't issue detailed sales forecasts, but it's likely that Penske is aiming for a similar boost in profitability in 2019, mainly thanks to strength in areas of its business that don't rely on robust increases in new car sales.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Penske Automotive Group. The Motley Fool has a disclosure policy.