U.S. sales of Smart cars hit a wall

FORTUNE -- Don't feel too sorry for automotive mogul Roger Penske, who this week threw in the towel on the exclusive U.S. distribution rights for the Smart line of small cars. Investors were cheering his decision Wednesday, along with the financial results of Penske Automotive Group (PAG, Fortune 500), bidding shares nearly to a three-year high.

The Smart ForTwo, a diminutive two-seater built by Daimler AG, simply never met sales expectations, reaching about 45,000 cars sold over a three-year period, but at a declining rate. "It had a rip-roaring start," said Tony Pordon, senior vice president for the Bloomfield Hills, Michigan company. "The last two years have been difficult."

Penske, chairman and chief executive officer, bought the U.S. rights to sell Smart cars on behalf of his company in 2008 on the belief that gasoline prices would rise sharply higher and the economy would remain buoyant. Neither of those things happened.

Instead, gasoline prices stagnated, the economy tanked and, complicating matters, the U.S. vehicle market has seen the proliferation of small-car competitors, such as the Honda Fit, Nissan Versa, Ford Fiesta, Toyota Yaris and Chevrolet Aveo.

Smart, which starts at just under $13,000 in price, offered a battery-powered version, which had a range of 60 to 65 miles on a charge.

Smart -- in this writer's opinion and based on a few test drives -- is an estimable model, fun to drive and easy to handle. For city dwellers the car can squeeze into the tightest parking spaces; and obviously it is fuel efficient (combined 36 miles-per-gallon). Safety tests suggested it is no less safe than any other small car. But -- and this reservation is key -- it simply doesn't look big enough to belong on the American road.

Or, to paraphrase Ronald Reagan the actor in one of his B-movie roles: What happened to the rest of the car? Smart looks as though its rear had been lopped off with a giant ax. American drivers are willing to sacrifice size for economy -- they're not willing to look ridiculous.

Penske, which operates retail dealerships of most brands in the U.S. and in the United Kingdom, had planned to add a second Smart model, a larger hatchback, built by Nissan. That deal was canceled along with the automotive company's decision to hand Smart back to Daimler. Daimler said it will continue to sell Smart at Mercedes-Benz dealerships.

For all of 2010, Penske earned $108.3 million, a 41 percent increase from 2009, on revenue of $10.7 billion. Its Smart USA unit lost about $16 million for the year. The results beat analysts' expectations and prompted a rally in the shares of other auto retailers. After dipping below $6 a share in early 2009, Penske's stock has been marching steadily upward, hitting $21 a share at the close of trading on Wednesday.

Roger Penske, in an interview with Reuters, said he would be "opportunistic" about buying additional dealerships this year and was negotiating with two Detroit automakers, whom he declined to identify, on deals to buy U.S.-brand franchises.