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WIKI ANALYSIS
Penske Automotive Group (NYSE: PAG), formerly United Auto Group, is the second largest US-based automotive retailer. Penske owns both new and used auto dealerships, as well as service centers to provide repair services and parts. The company generates 65% of its $13 billion revenue from luxury brand vehicles.[1] Penske dealerships also focus on import-brand vehicles and have exclusive US distribution rights for the smart car. The company diversifies geographically through its franchises in 18 US states, Puerto Rico, the United Kingdom, and Germany.[1]
The company competes in a highly fragmented market with the top 50 companies making up less than 15% of total sales.[2] CarMax (KMX) focuses primarily on the used car market, while AutoNation (AN), the largest auto retailer in the US, has seen significant falls in revenue and net income in three of its four market segments from 2006 to 2007.
Penske's net income continues to increase despite the credit crisis and economic downturn at the beginning of FY09. Premium-brand sales and Penske's higher net income business segments (Service & Parts, Financing & Insurance) have relatively less exposure to the business cycle than non-premium brands and the new and used vehicle retail business segments, respectively.
Company Overview
Penske Automotive Group, Inc changed its name from United Auto Group, Inc on July 2nd, 2007. Though headquartered in Bloomfield Hills, Michigan, Penske has avoided "Big 3" car manufacturers (Ford, GM, Chrysler) in terms of retail sales compared with its competitors. Penske operates 315 franchises worldwide marketing both new and used vehicles with a focus on its higher net income business segment in parts and repair services. The company sees customer loyalty during the initial sale and subsequent maintenance as essential to generating revenue for each particular dealership in parts and services. Revenue is also drawn through linking customers with third-party finance and insurance contracts and add-on sales.[1]
Penske has attempted to create a one-stop destination for customers by owning different car brand dealerships in close proximity. This kind of grouping gives Penske dealers a significant advantage in reduced administrative and personnel expenses over independent dealerships. [1]
Business and Financial Metrics
- The growth in both revenue and net income can be attributed to net dealership acquisitions and increases in same-store sales.
- Same-store revenue measures the amount of revenue generated by dealerships that have been open for at least six quarters (as opposed to dealerships acquired within the last six quarters). This measurement helps determine the saturation point, or when new acquisitions no longer contribute to revenue growth.[4]
- Net dealership acquisitions (NDA) represent the dealerships acquired in the past six quarters from the date measured minus the dealerships sold. Measurements of net dealership acquisitions indicate whether or not the company has good growth patterns.
| Change from 2006-2007 | Change from 2005-2006 | |
| New Vehicle same-store revenue | 5.5% | 2.3% |
| New Vehicle revenue from NDA (millions) | $499.5 | $552.4 |
| New Vehicle same-store net income | 1.2% | 0.9% |
| New Vehicle net income from NDA (millions)[4] | $43.1 | $51.1 |
| Used Vehicle same-store revenue | 14.5% | 8.9% |
| Used Vehicle revenue from NDA (millions) | $289.3 | $340.0 |
| Used Vehicle same-store net income | 9.7% | 7.0% |
| Used Vehicle net income from NDA (millions)[4] | $17.7 | $23.1 |
| Service & Parts same-store revenue | 7.4% | 7.3% |
| Service & Parts revenue from NDA (millions) | $99.8 | $132.2 |
| Service & Parts same-store net income | 9.1% | 8.6% |
| Service & Parts net income from NDA (millions)[4] | $99.8 | $132.2 |
| Financing & Insurance same-store revenue | 9.1% | 0.4% |
| Financing & Insurance revenue from NDA (millions)[4] | $22.1 | $18.1 |
| Total same-store revenue | 7.9% | 4.3% |
| Total revenue from NDA (millions) | $910.8 | $1042.9 |
| Total same-store net income | 6.6% | 4.5% |
| Total net income from NDA (millions) [4] | $910.8 | $1042.9 |
Business Segments
Penske divides its net income into four business segments: New Vehicle Sales, Used Vehicle Sales, Financing & Insurance, and Service & Parts.
- New Vehicle Revenue (59% of revenue, 31% of net income): Includes all revenue generated by sales of new vehicles. New vehicle revenue increased by 12.2% from 2005-06 and by 13.3% from 2006-07. Net income increased by 11.4% in 2005-06 but by only 9.1% in 2006-07. The growth in new vehicle revenue can be attributed to an increase in net dealership acquisitions along with an increase in the growth of same-store sales.[4]
- Used Vehicle Revenue (27% of revenue, 13% of net income): Includes all revenue generated by sales of used vehicles. Used vehicle revenue increased by 25.6% from 2005-2006 and by 24.5% from 2006-2007. Same-store revenues of used vehicles increased by 8.9% from 2005-2006 and by 14.5% from 2006-2007. Net used dealership acquisitions have fallen over the same period. Net income increased from 2006 to 2007 due to a 1.2% increase in same store average net income per used vehicle sold.[4]
- Service & Parts (12% of revenue, 41% of net income): Includes all revenue generated by retail sales of parts and maintenance of vehicles. Service and parts revenue increased by 20% from 2005-2006 and by 15.1% from 2006-2007. Net income increased by 21.3% from 2005-2006 and by 16.5%. Same-store revenue growth increased by 7.3% from 2005-2006 and by 7.4% from 2006-2007, but revenues from net dealership acquisitions fell significantly. Same-store net income increased by 8.6% from 2005-2006 and by 9.1% from 2006-2007, but this is outweighed by the decrease from net dealership acquisitions from 2005-2007.[4]
- Financing & Insurance (2% of revenue, 15% of net income): Includes all revenue generated by financing, warranty, and insurance contracts whether in-house or third party. F & I revenue increased by 8.3% from 2005-2006 and by 17.1% from 2006-2007. The large increase in growth from 2006 to 2007 was largely due to a 9.1% increase in same-store sales (up from .4% growth across 2005-2006), primarily due to increased sales penetration of higher revenue financial products at dealerships in the UK.[4]
Another way the company groups its revenue streams is by the brand of car that generated the revenue. Penske focuses particularly on premium-brand and import-brand vehicles. The following indicates the percentage of revenue by brand.
Key Trends and Forces
Automobile Manufacturers Decide Retail Prices
Automobile dealerships depend on car manufacturers for their product and have limited influence over their inventory.[5] Automobile manufacturers tend to exploit their bargaining position when negotiating franchise agreements (contracts permitting the dealership to sell their product) and often have the right to dictate the retailer's financial position.[6] Popular new vehicles produce a higher net income per vehicle than typical inventory, but manufacturers allocate these products based on sales history. By failing to provide this product, manufacturers can reduce dealerships' margins. Dealerships' relationships with manufacturers, manufacturer's marketing, and consumer interest in the manufacturer's product are all positively correlated with dealership sales.
High Premium and Import Brand Sales Insulate Penske from Cyclical Market
Just 6% of Penske's total revenue comes from the US domestic dealerships (selling General Motors (GM), Ford (F), and Daimler Chrysler brand vehicles). 65% of Penske's revenue comes from luxury brand vehicles[1], the market for which tends to be less exposed to the cyclical nature of the business cycle in general and the automobile market in particular. This is because discretionary spending of higher income individuals (consumers of luxury brand vehicles) is less limited during times of poor economic growth. On the negative side, purchasers of luxury or import brand vehicles tend to lease or pay in cash, reducing business in the industry's higher margin segment of financing.[7]
Ability to Acquire Dealerships in Mature, Fragmented Market Determines Growth
The car retail industry is fragmented with the top 50 companies earning less than 15% of total sales. The industry's low net income margins from new and used vehicle sales make it mature. Because Penske's independent competitors have smaller operations, they are unable to take advantage of economies of scale or reduce costs. An example of economies of scale is how accounting and IT technology can be replicated across Penske franchises, while each small independent competitor has to create or buy their own. In times of decreased demand, having an advantage in cost-cutting is essential. Financial adversity for independent dealerships primes the market for consolidation and Penske for expansion opportunities. Impediments to acquisition and expansion are manufacturers' possible refusal to transfer the franchise rights to a large, publicly-traded company like Penske since manufacturers prefer a competitive retail market for their product.
Oil Prices Drive Demand for Fuel-efficient, Higher Inventory, often Foreign-brand Vehicles
The growth in the price of fuel over the past couple years has driven the demand for hybrid and fuel-efficient vehicles. Penske, through a subsidiary, owns the sole US distribution rights to a popular "ultra-low emission vehicle"[1] in Europe, the smart Car. High fuel prices increase demand for both the smart Car and hybrid vehicles, an industry dominated by import brands.[8] Due to this trend and the fact that 29% of Penske's revenue is dependent on import brand sales, Penske dealerships expect to raise net income.
High Interest Rates Makes Floor-plan Financing and Consumer Financing More Expensive
Higher oil prices and their inflationary pressure often lead to higher interest rates. Interest rates negatively affect net income as most of a dealership's inventory is financed through loans known as floor plan financing (and Penske pays higher interest on these loans if interest rates rise). A significant number of consumers purchase vehicles by financing, and higher interest rates on these financing arrangements discourage sales. However, significantly fewer customers use financing arrangements when purchasing from Penske, because Penske offers a higher concentration of premium brand models (premium brand car purchasers tend to be higher income individuals with enough cash to buy without financing).
Competition
Though Penske does compete with independent dealerships, Penske dealerships primarily compete with well-capitalized franchises. Both online warehouses with lower costs and auto-manufacturer dealerships compete with Penske directly in some locations. The advent of these online retailers of both new and used vehicles have led to more informed consumers, which reduces price margins. Though Penske and its competitors offer a number of strategies to attract and retain customers, the company admits that the principal competitive factor is the advertising of a particular brand's manufacturers.[1]
- Autonation (AN) and its subsidiaries comprise the largest automotive retailer in the United States. Its 322 franchises are mostly located in the Sunbelt region of the United States (i.e. Florida, Texas, California) whereas Penske is more geographically diversified. Autonation has a much higher concentration of domestic-brand vehicles than Penske, but has a stated strategy of moving towards more import-brand and premium-brand vehicles.[9]
- CarMax, Inc. (KMX) focuses on the used car segment of auto retail. It operates 92 stores in 25 US states with a focus on no-haggle pricing and computer-based tracking systems. It has a small new vehicle sales division with six franchises selling 370 million cars (down from 445.1 million in 2006 and 502.8 million in 2005).[10]
- AutoZone (AZO) competes with Penske's auto parts division. These two products are not complete substitutes since AutoZone parts are intended for do-it-yourself installation, while Penske has manufacturer-licensed mechanics install the parts.
| 2007 | CarMax[10] | Auto Nation[11] | Penske [4] |
| Used Vehicles Sold | 377,244 | 206,140 | 102,214 |
| Used Vehicle Average Price | $17,298 | $16,440 | $30,809 |
| Used Vehicle Net income as % of Revenue | 10.8% | 8.5% | 8.0% |
| Used Vehicle Net income per Unit | $1,878 | $358.9 | $2,457 |
| New Vehicles Sold | 15,485 | 328,963 | 195,160 |
| New Vehicle Average Price | $23,795 | $30,993 | $35,909 |
| New Vehicle Net income as % of Revenue | 4.2% | 7.1% | 8.4% |
| New Vehicle Net income per Unit | $994 | $720.0 | $3,028 |
| Same-Store Net income | no data | $2,806,400,000 | $1,691,200,000 |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 PAG 2007 10-K, Item 1: Business, page 1-17
- ↑ Hoovers, "Industry Profile: Automobile Dealerships"
- ↑ PAG 2007 10-K, Item 6: Selected Financial Data, page 28-29
- ↑ 4.00 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 PAG 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 30-49
- ↑ Hoovers, "Industry Profile: Automobile Dealerships"
- ↑ PAG 2007 10-K, Item 1A: Risk Factors, page 18
- ↑ Journal of Consumer Affairs, "Vehicle acquisitions: leasing or financing?," 12/22/05, page 1
- ↑ Wikipedia, "Hybrid Electric Vehicles"
- ↑ AN 2007 10-K, Item 1: Business, page 2
- ↑ 10.0 10.1 KMX 2007 10-K, Item 6: Selected Financial Data, page 17
- ↑ AN 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 25-26
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