Buy This Stock Now For A 40%-Plus Upside Potential

| About: PACCAR Inc. (PCAR)

By Adam Fischbaum

During the 1970s, perhaps one of the strangest decades for American fads, CB radios and trucker-style entertainment blew up big. From cheesy novelty radio hits like "Convoy" to movies like "Smokey and the Bandit" and TV shows like "B.J. and the Bear" (about a trucker who drove around the country with a pet chimpanzee), America was all about truckin'. As a kid during that decade, I never got into it but I did learn the names Mack, Peterbilt and Kenworth as the machines that hauled the loads.

Oddly enough, during that time, the U.S. economy looked eerily similar in some ways as it does today: Stagnant growth, stubborn unemployment, political gridlock, public malaise and sideway financial markets. I don't think the "truckin'" fad will be revived, but a trucking-related stock might be a good choice for investors to profit from the slow-but-sure economic recovery.

Shifting into gear…

PACCAR Inc. (NASDAQ:PCAR) was incorporated in 1924 as the Pacific Car and Foundry Co. Today, the multinational company focuses on light-, medium- and heavy-truck design and manufacturing, as well as related aftermarket parts. The company's premiere brands include Peterbilt, Kenworth, DAF and Fonden. And while the business is cyclical in nature, many believe the sector is coming off of the bottom of a long downtrend.

After growing revenue at a compound annual growth rate of 5.7% from 2002 to 2007, PCAR sales skidded 35% to 153,000 units in 2008 and fell even further in 2009 to 108,000. To make matters worse, the company also faced a gaping $283 million hole in its pension liability. But despite these challenges, PACCAR has remained profitable even during the economic downturn of 2009 eking out 31 cents a share for that year, and beating it by 300% in 2010 ($1.25) and by 128% in 2011 ($2.86). And good trends are starting to develop for this company.

While U.S. demand for heavy trucks has slowed since the financial crisis of 2008 and European demand is cooling as a result of the region's current problems, heavy-truck demand in North America is poised to improve. The current U.S. truck fleet is very old, and people need to haul stuff across the country during bad or good times. In other words, trucks have got to work and when they don't, they need to be replaced.

In addition, as the United States tries to focus on energy efficiency, the company is leading the pack in the development of natural gas and diesel-hybrid truck engines. PACCAR is well positioned to take advantage of these longer-term trends, which will likely translate into higher earnings.

A well-built balance sheet…

One obvious reason why PACCAR was able to weather a horrendous financial performance in 2009 was the company's commitment to reducing its debt load. Currently, PACCAR's long-term debt to capitalization sits at an extremely low 2.7%. Lack of debt always frees up cash flow, and in this case, the company has put it to good use. For instance, PACCAR has shrunk the underfunded pension liability, from $283 million to $40.2 million. Return on equity is also impressive averaging about 20% during the past nine years. The company is expected to earn $3.33 per share this year, up 16.5% from last year.

Risks to Consider: PACCAR is an incredibly cyclical business. While the domestic economy is muddling along, one of the company's major markets, Europe, is dancing on the edge of a cliff. Don't expect the share price to gallop upwards like Apple (NASDAQ:AAPL) did. This is a longer-term, valuation/recovery story. PACCAR's strong balance sheet should help the company combat these challenges, as it did in 2009.

PACCAR shares currently trade at about $36.50, a 28% discount to their 52-week high, with a forward price-to-earnings (P/E) ratio of 10.8 and a decent 2% dividend yield.

Considering the forward P/E of the S&P 500 Index is 13, this represents a significant value for a brand-name company with a strong-as-steel balance sheet. A 12-month price target of $51 would translate into a P/E of around 15, which falls right into the middle of PACCAR's historical P/E range during the past decade. This would mean a 42% upside from current levels.

Disclosure: Adam Fischbaum does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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