The whole auto industry has been severely impacted by the declining European economy. Truck and truck engine manufacturers have not been an exception. CMI, in its second earnings release, reduced its outlook to flat revenues for the year from a 5%-10% rise due to the declining sales in Europe. Similarly, Ford (F) also increased its losses from European operations from $500 million to $1 billion in its latest earnings release. On Tuesday, Paccar Ltd (PCAR), a giant truck manufacturer, also reduced its production guidance.
PCAR announced that it would cut its production levels by 15%-20% in Europe and North America as compared to last quarter's production levels. The earlier guidance said that the company would only cut production levels in North America by 15%-20%, but not in Europe, which meant an overall reduction of only 10% in production for the company. The production levels for North America had been slashed due to slowing orders.
However, this revision of guidance did not come as a surprise for the market, which is probably why the stock hardly moved (closed down 65 bps only). The market already had examples of other manufacturers that had slashed the outlook for European operations. Also, industry orders for PCAR declined YoY each month in 2012 YTD. Calculations show that production levels on average exceeded orders by almost 7,000 units per month. Having said that, PCAR enjoys a good reputation of dealing with tough and challenging situations in the market, and is expected to rise to the occasion in the future.
PCAR stated that the production guidance in Europe was cut down in anticipation of a two week summer shut down. However, according to sell side analysts, it will be interesting to note whether the industry orders pick up after the summer, or further cuts have to be made in 2013. Tighter safety laws, expensive engines (due to environmental regulations) and strict credit policies have led to a decline in truck sales. This is also evident from the fact that the U.S. truck fleet is as old as it has ever been, and the current average age of truck is at all time high of 8 years. There are other possible risks that may lead to further declines in sales, which are shortage of truck drivers (the current shortage is 20,000) and ongoing headwinds from Europe from which PCAR gets one-third of its revenues.
PCAR snatched a considerable market share from Navistar (NAV) in the previous two years, as the latter saw its market share tumble from 25% in 2010 to 15% at present. This happened partially because of the new products made available in the market by PCAR, and also due to the ineffective policy of Navistar to stick to its non-compliant engine, which led to three consecutive quarters of declining revenues. However, NAV's trucks fitted with 15-L Cummins (CMI) engines are expected to roll out early next year, which will either reduce PCAR's share or will lead to a rise in the overall industry sales. This will serve as an important catalyst for PCAR's stock.
On Tuesday, PCAR announced a dividend of 20 cents per share for this quarter, which means a competitive dividend yield of 1.93%. The company currently trades at a forward multiple of 11x. However, this is well below the company's historical mammoth P/E of 48x. Historically, the company has traded at a higher than peer multiple at trough and a lower than peer multiple at peak levels. Currently, it is trading at a mid-cycle multiple, which is higher than its peers. Revenues have been on a rise since 2010. A 15% annual growth in earnings is expected for the next five years. Margins are expected to rise as new PCAR products hit the market. PCAR is expected to climb up as demand accelerates in North America and Europe. Important to note will be PCAR's strategy after the launch of compliant NAV trucks in January next year.
Disclosure: The article has been written by Qineqt's Industrials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article, has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.