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Morningstar | Penske Posts Strong 2Q Despite Soft New Vehicle Metrics

Penske Automotive reported a strong second quarter, and we see nothing in the numbers to merit a change in our fair value estimate or moat rating. Diluted EPS rose 28.5% year over year to $1.58, a second-quarter record that easily beat consensus of $1.44. Revenue increased 10.3% (up 7.4% excluding foreign exchange) to $5.9 billion, also beating consensus. Same store retail automotive revenue rose 7.9%. A weaker dollar against European currencies added $0.03 to EPS.

CEO Roger Penske did not directly say on the call that the company had the same lack of dealer incentives from BMW that dealer Sonic Automotive announced on July 18, but new vehicle profit did suffer relative to strong used vehicle metrics. BMW and Mini are about 22% of total retail automotive revenue and Penske's largest brands. Total retail automotive gross profit on all new vehicles fell 0.3%, so any BMW problems were likely made up for with other brands' performance. Used vehicle gross profit increased by 19.9% and gross profit per unit on new and used vehicles increased by 4.4% and 8.6%, respectively, so we are not worried about any continued shortfall in BMW incentive payouts to its dealers severely hurting Penske's results this year.

The other parts of Penske Automotive, such as standalone used stores, truck dealers, and Penske Truck Leasing, or PTL, are often overshadowed by retail automotive, but these other segments did quite well. PTL is an equity method investment that Penske owns 28.9% of, and equity income for the quarter increased by 41% to $35 million. Truck demand looks healthy both for rental and purchase orders. Penske's 21 truck dealers in the U.S. and Canada, mostly selling Freightliner and Western Star Daimler brands, grew unit volume by 61% and gross profit by 31%. The company's 14 standalone used vehicle stores in the U.S. and the U.K. increased volume by 69% (up 10% on a same store basis) and revenue by 80% (up 27% same store).

We think the used segment has a long growth runway both in Europe and the U.S. to keep opening stores as long as Penske chooses to allocate capital to growth, which we think it will. The firm ended the quarter with $700 million in liquidity and recently increased its quarterly dividend for the 29th straight quarter to $0.36. The company also has $150 million remaining on its buyback program after spending $5.8 million in the second quarter to repurchase shares at an average price of $48.61.

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