Madison Investments, an investment advisor, released its fourth-quarter 2025 investor letter for the “Madison Large Cap Fund”. A copy of the letter can be downloaded here. In the fourth quarter, the S&P 500 returned 2.65%, resulting in a full-year return of 17.9% for 2025. Over the last three years, the Index has achieved annual growth of over 21%. Following the recent trends, market leadership was defined by High Beta and Momentum factors, with narrow participation. However, in the fourth quarter, the mark ...

Acquisition and Growth - The company is expanding its operations in the U.S. and Italy, with plans to acquire two additional Lexus dealerships in Orlando, Florida, contributing to an estimated $2 billion in annualized revenue from recent acquisitions [1] - The total acquisitions discussed represent significant growth potential for the company [1] Financial Performance - In 2025, the company generated $31 billion in revenue, with nearly $1.3 billion in earnings before taxes (EBT) and $935 million in net income, resulting in earnings per share (EPS) of $14.13 [2][7] - The fourth-quarter revenue was reported at $7.8 billion, down 4% year-over-year, with EBT of $256 million and EPS of $2.83 [6][8] Operational Challenges - The company faced headwinds in the fourth quarter due to weaker demand for premium vehicles in the U.S. and U.K., with new sales of German luxury brands down approximately 20% in the U.S. and 22% in the U.K. [6][9] - A Jaguar Land Rover cyber incident impacted sales by about 800 units, contributing to an estimated $29 million EBT impact [6][12] Capital Allocation and Cash Flow - The company generated $1.0 billion in operating cash flow and $651 million in free cash flow, repaying $550 million of debt and repurchasing $182 million of stock [5][22] - A quarterly dividend increase to $1.40 per share was announced, marking the 21st consecutive increase [23] International Operations - International revenue for the fourth quarter was $2.8 billion, down 2%, with challenges in the U.K. market due to inflation and policy pressures [17] - In Australia, the company reported strong performance, with EBT nearly doubling year-over-year and significant project revenues [18] Future Outlook - Management expressed optimism for 2026, anticipating a recovery in the commercial truck market and a stronger U.S. macro environment [25] - The company is preparing for expected year-over-year comparability headwinds in the first quarter due to prior-year pull-forward effects [25]

Summary of Penske Automotive Group (NYSE:PAG) FY Conference Call Company Overview - **Company**: Penske Automotive Group - **Ticker**: NYSE:PAG - **Shares Outstanding**: 66 million - **Current Share Price**: Approximately $160 - **Market Capitalization**: About $10.7 billion - **Net Debt**: $1.5 billion - **Ownership**: 28.9% of Penske Transportation Solutions - **Total Enterprise Value**: Approximately $10 billion - **Business Segments**: Retail automotive, commercial vehicle dealerships, and energy solutions [1][2] Core Business Insights - **Retail Automotive**: Operates 356 franchises, primarily in premium luxury segments across the U.S., U.K., Germany, Italy, Japan, and Australia [2] - **Commercial Trucks**: Sells around 20,000 commercial trucks annually through 45 dealerships, exclusively Freightliner [2] - **Recent Expansion**: Entered the Australian market with three Porsche dealerships [2] Financial Performance and Projections - **Cash Flow from Tax Deductions**: Estimated additional cash flow of $120 million to $150 million annually from accelerated depreciation on truck purchases, based on $3 billion in annual purchases [3][4] - **Investment in Penske Transportation Solutions**: Total cash invested is $956 million, with $2 billion withdrawn, indicating strong cash flow management [4] - **Flat Performance**: Penske Truck Leasing has seen flat performance this year, with a reduction in the vehicle fleet from 445,000 to 405,000 [5] Market Conditions and Inventory - **Inventory Levels**: Current industry inventory is 2.6 million units, down 35% from pre-pandemic levels. Penske's inventory is well-managed with a 49-day supply in the U.S. [11] - **Luxury Vehicle Market**: Average transaction prices have increased, with new vehicles averaging $60,000 and used vehicles at $40,000, reflecting a shift in consumer financing behavior [13][16] Consumer Behavior and Financing - **Financing Trends**: Increasing number of customers financing vehicles for longer terms (beyond 6-8 years), raising concerns about negative equity situations [14] - **Leasing**: Leasing has decreased from 40% to 32%, but remains a more affordable option for consumers [14] Challenges in Used Vehicle Market - **Low Lease Returns**: The availability of quality used vehicles is a challenge, with a focus on zero to four-year-old cars [23][24] - **Sourcing Strategy**: 84% of vehicles sold are self-sourced, primarily through trade-ins [23] International Operations - **U.K. Market**: Contributes about $9 billion in revenue (35% of total business). Facing challenges due to government policies on EV sales and higher taxes impacting consumer behavior [28][30] - **Chinese Dealerships**: Recently added eight Chinese brands in the U.K. to explore market potential, with limited capital investment [36][37] Parts and Service Business - **Revenue Growth**: Parts and service revenue has increased by 35% compared to 2019, driven by warranty and customer pay services [38] - **Warranty Issues**: Recent recalls (e.g., Toyota and Lexus) are expected to boost service revenue, although they pose brand management challenges [39][41] Conclusion - **Future Outlook**: Anticipates improved performance in the truck leasing segment as market conditions stabilize. The company is well-positioned to capitalize on its diversified business model and strong cash flow management [43]

Financial Data and Key Metrics Changes - Q3 revenue was $7.7 billion, up 1% year-over-year [4] - EBITDA for the quarter was $292 million, with net income of $213 million and earnings per share of $3.23 [4] - Retail automotive same-store revenue increased by 5%, with service and parts revenue also up by 5% [4] - The average discount from MSRP on BEVs sold in the U.S. was $7,100, impacting new vehicle gross per unit by approximately $100 [5][6] Business Line Data and Key Metrics Changes - U.S. retail automotive same-store new units delivered increased by 9%, with revenue up by $300 million, nearly 10% [5] - Premier Truck Group same-store unit sales declined by 19%, with EBITDA down by $15 million [7][12] - In the UK, same-store units delivered declined by 7%, with a significant impact from a cyber incident at Jaguar Land Rover [14] Market Data and Key Metrics Changes - The U.S. retail automotive business showed strong performance, while the UK faced challenges due to inflation and a cyber incident [5][14] - International revenue was $2.9 billion, with a 23% increase in revenue from operations in Italy, Germany, and Japan [16] - The Class 8 market saw a 30% decline in orders and a 22% decline in retail sales during Q3 [11] Company Strategy and Development Direction - The company remains committed to its diversification strategy and has acquired a Ferrari dealership in Modena, Italy [23] - The focus is on enhancing relationships with brands and driving efficiencies in operations [18][19] - The company is adjusting its cost structure in response to market conditions and preparing for a rebound in the freight environment [12][18] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the diversified model's ability to adapt to market conditions [25] - The freight environment is expected to improve as capacity tightens due to regulatory changes affecting CDL drivers [42] - The company anticipates a gradual recovery in the used vehicle market as lease returns increase [71] Other Important Information - The company generated $852 million in cash flow from operations for the nine months ended September 30, 2025 [19] - Total debt was $5.6 billion, with a significant portion related to floor plans [20] - The company has returned over $2.5 billion to shareholders through dividends and share repurchases over the last four years [22] Q&A Session Summary Question: Clarification on Chinese brands and Sytner Select - Management confirmed the transition to Sytner Select involved reducing inventory while improving quality, with partnerships established with Chinese brands like Chery and Geely [29][30] Question: Impact of tax deductions on demand - Management indicated that the tax deduction for depreciation would have a positive cash flow impact, with expectations for continued demand in Q4 [33][36] Question: Visibility on recovery in Premier Truck Group - Management noted that freight rates have likely bottomed out, with expectations for capacity tightening and improved freight rates in the future [42] Question: Trends in luxury vehicle sales - Management highlighted strong performance in premium luxury sales, with expectations for continued demand despite challenges from specific brands [55][56] Question: Used vehicle gross profit increase - Management attributed the increase in used vehicle gross profit primarily to the Sytner Select strategy and improved inventory management [70][71]

Core Insights - Penske Automotive Group (PAG) reported second-quarter 2025 adjusted earnings of $3.78 per share, a 4.7% increase year over year, surpassing the Zacks Consensus Estimate of $3.56 [1][10] - The company achieved net sales of $7.66 billion, which fell short of the Zacks Consensus Estimate of $7.87 billion, representing a 0.4% decline from the previous year [1][10] Financial Performance - Gross profit for the quarter rose 2.6% year over year to $1.30 billion, while operating income increased by 3% to $348.2 million [2] - SG&A costs totaled $906.3 million, reflecting a 2.1% year-over-year increase [7] - As of June 30, 2025, cash and cash equivalents stood at $155.3 million, up from $72.4 million at the end of 2024, with long-term debt reduced to $906.7 million from $1.13 billion [7] Segment Performance - Retail Automotive segment revenues decreased by 1.5% to $6.52 billion, missing estimates, with total new and used vehicle deliveries down 11.9% year over year to 102,545 units [4] - Retail Commercial Truck segment revenues increased by 5.7% to $943.6 million, exceeding estimates, although gross profit slightly declined [5] - The Commercial Vehicle Distribution and Other segment saw revenues rise by 6.5% to $201.2 million, surpassing estimates, but gross profit fell short of expectations [6] Shareholder Returns - PAG repurchased 630,044 shares for $93.3 million, with $295.7 million remaining in stock repurchase authorization as of June 30, 2025 [8] - The quarterly dividend was increased by 6 cents to $1.32 per share, marking the 19th consecutive quarterly increase, payable on September 3, 2025 [8]

Core Insights - Penske Automotive reported revenue of $7.66 billion for the quarter ended June 2025, a decrease of 0.5% year-over-year, with EPS at $3.78, up from $3.61 in the previous year [1] - The revenue fell short of the Zacks Consensus Estimate of $7.87 billion, resulting in a surprise of -2.63%, while the EPS exceeded expectations by +6.18% [1] Financial Performance Metrics - Retail Automotive Gross Profit Per Vehicle Retailed for new vehicles was $5,443, surpassing the average estimate of $5,125.47 [4] - Retail Commercial Truck Revenue Per Vehicle Retailed for new vehicles was $141,345, exceeding the average estimate of $138,729.90 [4] - Retail Automotive Units for used retail were 54,999, below the average estimate of 62,109 [4] - Retail Automotive Revenue Per Vehicle Retailed for new vehicles was $61,340, compared to the estimated $56,292.94 [4] - Revenue from Retail Automotive for new vehicles was $2.94 billion, lower than the estimated $3.13 billion, reflecting a -1.8% change year-over-year [4] - Revenue from Retail Automotive for fleet and wholesale was $358.1 million, below the estimated $376.45 million, representing a -6.3% change year-over-year [4] - Revenue from Retail Automotive for service and parts was $816.6 million, exceeding the estimate of $791.44 million, with a year-over-year change of +8.5% [4] - Revenue from Retail Automotive for finance and insurance was $200.5 million, compared to the estimated $208.12 million, reflecting a -3.9% change year-over-year [4] - Revenue from Retail Automotive for used vehicles was $2.2 billion, below the estimated $2.27 billion, representing a -3.3% change year-over-year [4] - Total Revenue from Retail Automotive was $6.52 billion, lower than the estimated $6.78 billion, indicating a -1.5% change year-over-year [4] - Revenue from Retail Commercial Truck was $943.6 million, exceeding the estimated $906.79 million, with a +5.8% change year-over-year [4] - Revenue from Commercial Vehicle Distribution and Other was $201.2 million, surpassing the estimated $195.44 million, reflecting a +6.5% change year-over-year [4] Stock Performance - Penske's shares have returned -5.5% over the past month, contrasting with the Zacks S&P 500 composite's +3.4% change [3] - The stock currently holds a Zacks Rank 4 (Sell), indicating potential underperformance relative to the broader market in the near term [3]