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Morningstar | Penske's 4Q Hit by Inventory Shortages in German Luxury Brands

Penske Automotive Group's fourth-quarter results gave us no reason to change our fair value estimate. Adjusted diluted EPS of $1.11 missed consensus of $1.15 but was still a fourth-quarter record and grew 9.9% year over year. Revenue grew 0.8% and slightly missed consensus, while same-store retail automotive revenue fell 0.9%. Weakness came from new-vehicle sales, which suffered from inventory shortages of German automakers' vehicles due to earlier noncompliance with WLTP emission rules in Europe. VW's Audi and Porsche brands, for example, each suffered unit sales down over 40% in the U.K. in the quarter, and CEO Roger Penske said inventories won't be back to normal until the end of the first quarter. The company said these shortages cost it $0.06 of EPS in the quarter but foreign exchange had no EPS impact. Retail Automotive's new-vehicle gross profit per unit fell by 3.9% to $3,029, while used vehicle GPU fell 1.4% to $1,272. WLTP inventory shortages are especially painful for Penske because it derived 35% of its full-year 2018 retail automotive gross profit from the U.K. This mix was only 31% for the fourth quarter, which was actually 200 basis points above fourth-quarter 2017.

Management is not giving any guidance on the impact of a hard Brexit, with the March 29 deadline looming. One positive for the company compared with the Great Recession is Penske now has a stand-alone used-vehicle store business in the U.K as well as in the U.S. This means that in addition to focusing more on used vehicles in the U.K. franchise stores should Brexit become a problem, as well as cutting overhead, the company can get extra used-vehicle business on the stand-alone side. For the full-year 2018, the stand-alone business globally sold 71,013 units and generated nearly $1.3 billion of revenue. The business now has 14 stores, nine are in the U.K., and Penske plans to open four more in 2019, two in each market.

Penske's 2019 looks bright to us, though we think the commercial truck business may find it difficult to grow its top-line 31% as it did in 2018 to $1.4 billion. The company has 20 truck dealerships in the U.S. and Canada, and they mostly focus on Daimler's Freightliner and Western Star brands. $136.9 million is available for share repurchases and the board recently increased the quarterly dividend to $0.38. This increase was the 31st consecutive quarter with an increase, and Penske's healthy dividend yield of 3.5% is easily the highest of the six publicly traded auto dealerships.