Morningstar | Currency, Inventory Shortages, and Pricing Issues Hurt Penske's First Quarter
We are not changing our fair value estimate on Penske Automotive Group as first-quarter numbers, although a bit weak, were still solid. Diluted EPS from continuing operations of $1.19 missed consensus of $1.23 while same-store automotive retail revenue fell 1.4% excluding foreign exchange headwinds. Penske gets a bit over one third of its business from the U.K., so Brexit weighing on the pound likely explains the $0.04 EPS hit from currency. The company also disclosed a $0.09 hit from restructuring and continued headwinds from inventory shortages due to German automakers failing to complying with WLTP emission regulations enacted last September. Management hopes WLTP is behind it, and we think for the most part it is.WLTP relief should help not only new vehicle business, given Penske's 70% revenue mix to premium brands, but also help used vehicles because new vehicle customers bring trade-ins. These trade-ins are now more valuable thanks to the company's 14 standalone used vehicle stores, CarSense in the U.S. and CarShop and The CarPeople in the U.K. CEO Roger Penske said the company used to wholesale trade-ins that didn't make the cut to be sold at franchise dealerships as used cars and made GBP 200, but now it can retail these vehicles and try to make about GBP 2,000 including financing. The standalone used business had a rough quarter, however, with unit volume down 3.4% year over year and gross profit per unit down 23.3% on a constant currency basis. Penske told us that the CarPeople's pricing algorithms could not find vehicles to buy at auction that offered good profit potential. This meant selection declined in stores for some models and in other cases the company paid too much to acquire inventory. These bumps may happen from time to time, but we continue to think expanding into standalone used is a good idea because it offers growth as new vehicle demand is declining. The company plans to open four more standalone used stores this year.
Penske Automotive Group is a transportation services company that operates automotive and commercial truck dealerships and distributes commercial vehicles, diesel engines, gas engines, power systems and related parts and services. The company has four segments: Retail Automotive, consisting of its retail automotive dealership operations; Retail Commercial Truck, consisting of its retail commercial truck dealership operations in the United States and Canada; Other, consisting of its commercial vehicle and power systems distribution operations and other non-automotive consolidated operations; and Non-Automotive Investments, consisting of its equity method investments in non-automotive operations.
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