Tallahassee, FL 10/27/11 (PennyPayDay) --Penske Automotive Group (NYSE: PAG), the second largest automotive retailer in the U.S., appears well positioned to weather the current supply constraints. It has substantial exposure to premium/luxury brands, and the company should also benefit from a recovery in the new-vehicle market. It is prepared to profit from consolidation that has taken place in the franchised dealership industry and resulted in record profit margins as a recovery gains speed. On Wednesday morning, November 2, the company is scheduled to release its 3Q (September) financial results, followed by a conference call at 2pm ET. Penske expects to report a 21% increase in 3Q EPS from continuing operations on an 8% rise in total revenue. The revenue forecast is based on a 7% expected increase in same-store sales and a top-line contribution of about $125 million from acquisitions consummated during the past year. Although same-store new Japanese vehicle sales are declining by 2% in the 3Q, Penske offsets that with used-vehicles sales for the same vehicles rising by roughly 15%.
The company anticipates that a higher gross margin will more than offset any new-vehicle sales weakness. Inventories of many popular brands are very low, causing most dealerships to exhibit discipline on pricing and advertising spending. Penske looks to take advantage of this fact, and believes its premium/luxury exposure (68% of new-vehicle sales) should cushion the company from supply constraints. Consequently, it projects a 26 base point gross margin increase in 3Q, with significant improvements both in new and used vehicle margins.
Key components of Penske's operations, most notably the sale of new vehicles, are vulnerable to the strength and weakness of the economy, both national and regional, as well as credit market conditions. The purchase of a car, even a used vehicle, is a big-ticket item that prompts most buyers to finance much of the purchase price. Penske remains encouraged that there appears to be healthy underlying demand for new vehicles that should result in improving sales momentum in 2012. Despite the weak economy, tight supply, and volatile financial markets, the company is happy to ‘settle’ with a $13 million annual sales rate.
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