Penske Automotive Group, Inc. ( PAG - Analyst Report ) reported a net income of $39.9 million or 43 cents per share in the second quarter of 2011 from continuing operations compared with $31.0 million or 34 cents per share in the year-ago period. Reported earnings were higher than the Zacks Consensus Estimate of 38 cents per share.

Revenues in the quarter climbed 10.5% year over year to $2.89 billion, mostly driven by a 6.3% rise in total retail sales to 70,873 units along with a strong performance from the parts and service business. Same-store retail revenue climbed 9.8% to $2.67 billion.

The growth in same-store revenue reflected improvements in each of the company’s operating segments. Same-store retail revenue increased 17.6% for used vehicles, 10.8% for finance and insurance segment, 6.2% for new vehicles and 6% for service and parts. On a region basis, same-store retail sales increased 7.5% in the U.S. and 13.6% in the international market.

New Vehicle revenues surged 8.4% to $1.42 billion although new vehicle retail sales dropped marginally to 37,830 units. Similarly, Used Vehicle revenues went up 19.5% to $880 million based on an increase of 16.1% in sales to 33,043.

Revenues in the Service and Parts segment grew 7.5% to $348.0 million, while that in the Finance and Insurance segment increased 12.2% to $69.2 million. However, revenues fell 5% to $169.0 million in the Fleet and Wholesale Vehicle segment.

Penske recently completed the acquisition of Crevier BMW-MINI, in Santa Ana, California, and Mercedes-Benz of Greenwich in Connecticut. This has resulted in the acquisition of seven franchises by the company in the year-to date period. With these new developments, Penske expects to add almost $525 million to its revenues on an annualized basis.

During the quarter, the company repurchased 618,209 of its common stock at an average price of $20.06. The company has a current authorization to repurchase up to $138.6 million of its outstanding common stock, debt or convertible debt.

Moreover, holders of the company's 3.5% Senior Subordinated Convertible Notes Due 2026 tendered $87.3 million of the $150.6 million outstanding principal amount of the notes to the company. The company purchased the notes using its revolving credit facility and available cash.

Penske had cash and cash equivalents of $3.35 billion as of June 30, 2011, which deteriorated substantially from $17.9 billion as of December 31, 2010. However, long-term debt amounted to $706.5 million at the end of the second quarter of 2011 compared with $769.3 million at the end of the fourth quarter of 2010.

Our Take

The company’s recent acquisitions and business expansion plans are expected to generate fruitful results going forward. However, the overall situation in the U.S. retail vehicle market is challenging for both new and used car sales volume.

Alongside, the company faces strong competition from both retail and service centers owned by OEMs, apart from the other franchised automotive dealerships in the market, namely AutoNation Inc. ( AN - Analyst Report ) and CarMax Inc. ( KMX - Analyst Report ) .

Thus, the shares of Penske Automotive Group are maintaining a Zacks #3 Rank, which translates into a recommendation of “Hold” for the short term (1 to 3 months) and we reiterate our recommendation of “Neutral” for the long term (more than 6 months).