Penske Auto Exceeds Smart Car Advanced Reservation Goals

"People generally in life will take what you give them."

Source: Richard Thorne, Kimberly-Clarke Corporation

- From an Associated Press article by Greg Bluestein (July 11, 2007) discussing Kimberly-Clark's new electronic toilet dispenser machine that spits out five sheets of paper with the potential to reduce toilet paper usage by 20%.

The 3rd Annual Double Barrel Skim Board competition is this weekend (and yes I was dumb enough to enter again). So believe it or not I am going to try to be brief the rest of this week.

But I wanted to give you some numbers behind the headlines you will be reading about on the Smart vehicle today, confirm CarMax's (KMX) succession plan, and let you know about Ford's (F) hydrogen capabilities.

Penske Automotive Group (PAG) Exceeds Goal with Smart Reservations
In a press conference yesterday in Detroit, Smart USA President Dave Schembri said they have received more than 20,000 reservations for the Smart Vehicle that will be available at some 45 - 60 dealers beginning in January 2008. (Source: Wall Street Journal, January 11, 2007. Page D4).

Keep in mind that the reservations only require a $99 deposit. So people can still back out. But it is a heck of a lead.

If all reservations are filled, it works out to 333 to 444 Smart vehicles per dealership.

However, Penske Automotive is the distributor of Smart. So this does not mean Penske Automotive is going to own all of the stores. They own some of the stores. But a lot of the stores are owned by other dealers (including some of the large public dealers).

So you likely won't see a huge boost in gross profit dollars or percentages (and actually it might cause a slight drag in 2008).

As a reminder, Penske Automotive made about $2,993 in gross profits per new vehicle in 2006 and $2,427 per used. Also if you take the company's fleet and wholesale gross profits divided by the total retail units (because I hope wholesale is looked at as driving used vehicle sales and fleet possibly helps drive some new vehicle retail sales) you come up with $14 gross profit per retail unit.

My guess is that Smart counts as a fleet sale and so you see the $14 figure go up a bit in 2008. But you will also see total gross profits as a percentage of revenues decline a bit (all else equal).

But dollars per unit and percentages are less important than return on investment [ROI]. So if Penske is essentially collecting a "toll" on every one of the units being sold at the stores, it can make for a pretty attractive ROI.

Now I don't know what Penske Automotive will make on the sale of each Smart vehicle (through the distribution agreement). We can all try to guess ($200/$300 per unit?) But we just don't know.

And this can create problems when trying to model the impact Smart will have on the company's financial results in 2008. So let me give you some numbers to work with.

We know that management said they expect to earn between $1.40 to $1.50 per diluted share this year (2007). This guidance assumed 94.6 million shares outstanding throughout the year (a couple million more than they had in the first quarter). And this works out to $135 million to $145 million in after tax earnings in 2007.

Included in the earnings guidance, management also said they will have $0.02 to $0.04 cents a share in costs associated with the launch of the new Smart vehicles. Or, $2.0 million to almost $4.0 million in after tax expenses. They've got around a 37% tax rate. So if I put these numbers on a pre-tax basis, we're talking about $3.0 million to $6.0 million bucks in expenses associated with Smart.

I suspect the conservative nature of the Penske organization only includes direct costs with Smart. For example, Sr. Vice President Tony Pordon has been playing a key role with Smart. But he also continues to exercise his duties as head of investor relations. So do they divide his salary and include it in the Smart costs? I suspect not.

Instead the $3.0 to $6.0 million in expenses being called out by the company on the conference calls are probably set up costs (systems, administration, etc.). And also some of the "road show" marketing that the company has been doing with signing up dealers and even sending the vehicle around the country to increase awareness.

They may have more expenses when they actually go live (distributing to the 45 - 60 dealers), they may have less. We don't know.

But based on the expenses we know right now (the $3.0 to $6.0 million), what it tells me is that at 20,000 Smart unit sales, Penske needs to make $150 to $300 per vehicle to break even. And at 40,000 units (so 2x the reservations) the company needs to make $75 to $150 per Smart to break even.

CarMax Confirms Succession Plan
As you may remember, one of the many things included in yesterday's novel was a survey I did with the management teams about whether or not they had a succession plan in place.

Specifically, I asked each management team if one of the top three executives could no longer serve the company, if they had identified someone to replace that individual.

I said that I had not heard back from CarMax, but recent filings suggested the Nominating Committee was paying attention to succession planning.

I heard back from Celeste Gunter (CarMax Investor Relations) yesterday. And she informed me that the company's formal answer to my question is "yes."

Ford and Internal Combustion Hydrogen Engines
"It doesn't have the sizzle of a fuel cell, but it's got the steak of the meal."

Source: John Lapetz, Ford Program Manager for the 30 E-450 hydrogen buses in operation at airports throughout the U.S. and Canada. (Associated Press, Tom Krisher, July 10, 2007)

The Associated Press article said Ford has the ability to bring internal combustion hydrogen technology to the market within 5-years if "fuel storage limitations can be solved, public fear of hydrogen can be allayed, filling stations set up, and gas prices stay high."

Ok, so a lot of ifs. But I found it interesting that they might be that close.