United Auto Group: Slightly Disappointing Results Create Buying Opportunity

| About: Penske Automotive (PAG)

UnitedAuto Group (NYSEARCA:UAG) reported fourth quarter and full year 2006 earnings results today. The figures were in-line with Reuter's consensus of analyst estimates, but below my estimate.

My quick take (I'll save the bulk of my comments for after the conference call):

4Q06 earnings per share (eps) of: $0.33 (from continuing operations), were pretty similar to the company's 4Q05 results, but below my forecast of $0.35. I don't get worried about a company missing or beating my forecast in a given quarter. But I do like to see earnings improving (year over year). So it is important to remind investors that last year in 4Q05, the company benefited from a gain of $5.2 million ($0.06 a share after tax) in service contracts (from a pool of contracts sold at its dealerships 2001 - 2005). So last year's eps was really $0.27 on a comparable basis.

Excluding the service contract gain, earnings per share from continuing operations were up 16.1% (year over year) on a comparable basis. This would tend to support my thesis that the industry backdrop was better in 4Q06 versus the third quarter, when UAG only posted a near 10% year over year improvement in earnings. But I don't totally know how to interpret UAG's results (as being indicative of the overall industry because they are ~30% international).

I should also point out that UnitedAuto Group's fourth quarter results BENEFITED from its tax rate dropping to 23.8% in the quarter versus 35% in the prior year period. Management indicated it was due to the company's foreign income being higher as a % of the total (where apparently the foreign tax rate is lower) and some state tax rate planning initiatives that reduced the company's overall tax rate (in other words they were able to "true down" the fourth quarter tax better reflect the company's full year state taxes).

If I give the company the same tax rate that it had in 4Q05, earnings per share from continuing operations were closer to $0.28. So comparable operating earnings were only up marginally from last year. Although I think management deserves some credit for prudent tax planning.

Guidance for 1Q07 was $0.26 to $0.30, and for the full year (2007) $1.40 to $1.50. Reuters indicates the analyst consensus numbers were more like $0.30 in 1Q07 and $1.56 for all of 2007. I was estimating $0.32 in the first quarter and $1.65 for all of 2007.

I don't know how international operations impacted everything (although it sounds like if anything that held up better than the company's U.S. stores). While the figures may not have been what the analysts (or even I) were looking for, the earnings were up. I should also point out (like I did in my January US vehicle sales notes) that it appears the foreign/luxury brands are the ones seeing the inventory increase. So unlike the last several quarters, we may actually see those dealer groups with more domestic brands be the beneficiaries from an improved inventory environment.

I think we'll get a better picture of this over the next few days as other auto retailers (like Asbury (NYSE:ABG) and Lithia (NYSE:LAD) report).

In any case, like I said yesterday, I think UnitedAuto Group is a tremendously well run organization. Every dealership group stumbles from time to time. And so when a company like UAG seems to miss expectations, I just tend to look at it as an opportunity.

Below is a snapshot of the results:

4Q06 Total same-store sales: up 7.1% (retail)

New: 5.5% (retail)

Used: 14.5% (retail)

Parts and service: 6.2% (retail)

F&I: negative 9.6% (once again I think due to the service contract true up in last year's 4Q.)

4Q06 Gross profit: 15% down 70 basis points from 15.7% in the prior year period

New: 8.8%, down 20 basis points from the prior year period.

Used: 8%, down 60 basis points from the prior year period.

Parts and service: 54.9%, down 20 basis points from the prior year period.

SG&A as a percent of gross: 81%, up 4 full percentage points from 77% in last year's fourth quarter. But don't forget, last year's gross profit benefited from the service contract gain.

Tax rate: 23.8% versus 35% last year (as discussed above).

Share count: 94.389 million versus 94.374 million last year.

Long-term debt/cap: 47.6%, up from 33.5%.

Key takeaway from the press release:

Chairman Roger Penske said:

Our business achieved solid same-store retail revenue growth during the fourth quarter, despite a difficult comparison to last year. I am pleased with the same-store results, especially in our service and parts operations which included 13.6% same-store growth in our international markets. These results highlight the benefit of our ongoing capital investment program.

UAG 1-yr chart:

UAG 1-yr chart

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Tagged: , , , Auto Dealerships, Earnings
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