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Morningstar | Penske Has Solid 3Q Despite WLTP Headwinds in Europe

Penske Automotive posted record third-quarter income from continuing operations and record adjusted diluted EPS from continuing operations but we saw nothing to merit changing our long-term assumptions or expectations for vehicle demand. We are leaving our fair value estimate in place. The company rarely has special items but income from continuing operations, excluding a $11.6 million tax gain for the final reconciliation of the tax benefit for the 2017 U.S. tax law change, grew 25.7% year over year, while adjusted EPS rose 27.3% to $1.40 beating consensus of $1.36. Revenue grew 2.4% to $5.66 billion, slightly below consensus, but did rise 2.9% excluding a stronger U.S. dollar against the British pound. Management reported foreign exchange only cost the company about $0.01 per share in EPS. Same-store automotive retail revenue grew 0.2% while the firm's truck dealership same-store revenue grew an impressive 25.4%. CEO Roger Penske sounded optimistic about continued growth in heavy truck demand in 2019, though we note driver shortages are an issue in this sector.

The standalone used vehicle business continues to grow following the January acquisition of The Car People in the U.K. Standalone now has 14 stores in the U.S. and U.K. and the division's same store unit volume and revenue grew 4.6% and 17.1%, respectively. This concept can be scaled globally over time and should prove to be a smart move by Penske in our opinion. Roger Penske said on the call that a single brand for the U.K. and future international operations will be announced soon. It sounds to us that the U.S. side of this business will remain branded as CarSense. We do not expect the Penske name to be used in the standalone used business.

Europe suffered from German brand supply shortages due to brands such as Audi, Porsche, and BMW unable to fully stock dealerships due to not complying with new emission standards called Worldwide Harmonised Light Vehicle Test Procedure, WLTP. Roger Penske expects WLTP lost sales issues to slow the company's European operations through the first quarter of 2019 but we think Penske can weather the supply shortages with smart cost management and more focus on used vehicles. The U.K. is 39% of the retail automotive business. We also are glad to see the company stay disciplined on pricing in new vehicles in retail automotive, which some dealers are unable to do. New vehicle unit volume fell by 8.4% but new vehicle gross profit per unit grew 6% to $3,050, which shows Penske did not chase volume at the expense of profit. Penske's brand mix skewing to premium and luxury names likely plays a role in this pricing difference from other dealers.

Penske Automotive Group is participating at our Management Behind the Moat conference held at Morningstar’s Chicago office on Nov. 7-8, 2018. If you are interested in attending, please reach out to your sales representative for registration information.