Penske Earnings: Agency Model Change Does Not Seem To Be Hurting Our Investment Thesis

Penske’s PAG first-quarter diluted EPS of $4.31 beat the $4.13 Refinitiv consensus and fell 9.5% year over year. Foreign exchange took $0.11 from the figure as well as $294.2 million from sales. We are not changing our fair value estimate. Same store retail automotive revenue rose 1.9% (up 6% excluding foreign exchange) on good growth from new vehicles and service. The 39-store truck dealer segment is enjoying stellar demand for new Class 8 trucks and a 12% rise in new truck gross profit. Further, 17% profit growth in truck service offset a 66% decline in used truck gross profit. Penske raised its dividend in January by 7% and spent $110.2 million on buybacks in the quarter. The board increased the repurchase authorization in February by $250 million, leaving $214.1 million remaining as of March 31. With a leverage ratio of only 0.9 times and the company recently increasing its U.S. credit line by $400 million to $1.2 billion, we see Penske well set up for acquisitions if it finds the right bargain and for continued buybacks and dividend growth.

The Mercedes stores in the U.K. were a key focus point this quarter as they transitioned to an agency model. Agency refers to Mercedes selling a new vehicle to the consumer with delivery occurring at a Penske store. Penske records no revenue and instead books a 5% commission paid by Mercedes to the dealer in new vehicle sales with zero cost of sales. Penske’s used vehicle, service, and financing businesses are not affected by the change. Agency is gaining traction in Europe but, per management, is not allowed under U.S. franchise law. Penske benefits from not having any floorplan interest expense for inventory carrying costs of agency brands nor for other costs such as sales brokers, new vehicle training, and marketing. Agency units delivered in the quarter totaled 6,933, which we calculate was 5.7% of total retail new and used automotive units delivered. We don’t see a profitability fall-off from the change.