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Penske Auto Group (PAG) |
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WIKI ANALYSIS
Penske Automotive Group (NYSE: PAG), 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 revenue from luxury brand vehicles like Audi, BMW, Cadillac, and Porsche. 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 the US, Puerto Rico, the United Kingdom, and Germany. Two thirds of the company's sales come from its US operations.[1] In 2009, the company's net sales and net income were $9.5 billion and $76.5 million respectively.[2]
The automotive retail market generates $600 billion annually and has 20,500 franchised dealerships; however, this market is extremely fragmented. Publicly held automotive retail groups like Penske only account for 10% of the market -- the other 90% is held by smaller regional and independent players.[3] Some of Penske's publicly held competitors like CARMAX (KMX) focuses primarily on the used car market, while AutoNation (AN) is the largest auto retailer in the US.
Penske's net income continues to increase despite doing business in a sluggish economy. Premium-brand sales and Penske's higher net income business segments (Service & Parts, Financing & Insurance) are somewhat shielded from the business cycle than non-premium brands and the new and used vehicle retail business segments, respectively. However, the sluggish economy still had a negative effect on the company's overall car sales as net sales fell 18% in 2009.[2]
Company Overview
Though headquartered in Bloomfield Hills, Michigan, Penske has avoided the "Big 3" car manufacturers (Ford, GM, Chrysler) in terms of retail sales compared with its competitors. In fact, 95% of the company's revenue comes from non-US based car manufacturers. Penske operates 306 franchises worldwide marketing both new and used vehicles with a focus on its higher net income business segment in parts and repair services.[1] 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.
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.
Business Segments[4]
Penske divides its net income into five business segments:
- New Vehicle Retail Sales (53% of revenue and 24.3% of profit): here the company sells forty brands of domestic and import family, sports and premium cars, and light trucks and sport utility vehicles. Dealerships acquire new vehicles directly from the manufacturers.
- Used Vehicle Retail Sales (29.5% of revenue and 14.4% of profit): Penske acquires used cars from sources like auctions and trade-ins.
- Vehicle Finance, Extended Service, and Insurance sales (2.5% of revenue and 14.3% of profit): the company offers third-party financing and leasing, vehicle warranty, extended service contracts, maintenance program, and insurance.
- Service and Parts Sale (15% of revenue and 47% of profit): Penske has a service and parts department at its dealerships so that its customers can get periodic maintenance or service. The company also has 25 collision repair centers.
- smart USA (1.9% of revenue and 1.1% of profit): smart USA is a wholly-owned subsidiary of Penske that distributes the smart fortwo vehicle in the US.
Business Growth
FY 2009 (ended December 31, 2009)[2]
- Net sales fell 18% to $9.5 billion. The number of new cars sold fell 17.9% and same store sales growth at new car dealerships fell 20.3%. This was offset by a 0.4% increase in used car sales.
- Net income improved to $76.5 million compared to a net loss of $420 million in the previous year. SG&A expenses fell 11.7% for the year.
Trends and Forces
Automobile Manufacturers Decide Retail Prices
Automobile dealerships depend on car manufacturers for their product and have limited influence over their inventory. 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. 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 5% 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, 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.[1]
Ability to Acquire Dealerships in Mature, Fragmented Market Determines Growth
The car retail industry is fragmented with publicly traded companies earning just 10% of total sales.[1] 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" in Europe, the smart Car. High fuel prices increase demand for both the smart Car and hybrid vehicles, an industry dominated by import brands. 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
The automotive retail sale industry generates nearly $600 billion annually from 20,500 franchised dealerships. 57% of the revenue comes from new vehicle sales, 29% from used vehicle sales and 14% from service and parts sales. Although publicly held companies are typically bigger than private ones, publicly held auto retailers only account for 10% of the market -- so 90% of the market is held by smaller regional and independent players.[3]
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.
- 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.
- CARMAX (KMX) focuses on the used car segment of auto retail. It operates near 100 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.
- 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.
References
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