Paccar Ltd (PCAR), the truck manufacturer, has topped earnings estimates for all of its previous four quarters. While the same did not happen this time around, as the company produced an EPS in-line with expectations, it did manage to top revenue estimates.
PCAR is a light, medium and heavy duty truck and engines manufacturer. The company sells its trucks to other dealers with nameplates of Kenworth, Peterbilt and DAF. During the past three months, analyst estimates for EPS had been brought down from 78 cents too 66 cents. The decline in both earnings and revenue figures paints a dirty picture for not only the company, but also for the overall truck manufacturer industry. The PCAR management itself admitted that truck orders had been weak from the North American and European markets.
The market has already been getting signals for the weak trucking markets in the U.S. and Europe. In the second week of September, PCAR announced that it would cut its production levels by 15%-20% in North America and Europe for this quarter, as compared to the previous quarter. Also, according to ACT Research, orders in the month of September for Class 8 trucks were down 5% MoM and 34% YoY. According to PCAR's management, the Class 8 industry retail sales in the U.S. and Canada are expected to be in the range of 210-220k vehicles in 2012. Most of the company's revenue comes from Class 8 trucks, a market that it gained considerably from its competitor Navistar (NAV), after the latter ended up losing a big chunk of its market share to PCAR because of its disastrous engine strategy. Currently, PCAR enjoys 29 percent of the market share in the U.S. market.
Also, the company expects Class 8 retail sales to be 210-240k for 2013. Currently, the average age of a truck in the U.S. truck fleet is at an all time high of 8 years. The annual replacement demand for the U.S. and Canadian truck markets is expected to be 225,000.
Even though the revenue and earnings figures were down YoY, they were up 20% and 13% for the first nine months, as compared to the same time period a year ago. The company is optimistic for the future given that it is expanding its product line. The company, with the help of strong cash flows, has made the broadest launch in its history. DAF's premium products have been a hit in Europe. Under the DAF brand, the company operates both in the tractor, as well as the truck market. The company is considered to be a market leader in the tractor market, with a 19 percent market share. The market share in the truck market is 16 percent. The company is also expanding in South American and Russian markets. The company also has a wide portfolio of engines. It is planning to expand its engine line in 2013, which will have superior horsepower and torque.
Despite a weak truck market, the company was able to perform up to market expectations. The strong operating performance was highlighted by flat SG&A spending, despite rising investments in different parts of the world, especially Brazil. In the long-run, the sell-side expects PCAR's aggressive trucking CAPEX to be reduced, as PCAR has been through most of its product launch. The cost management actions will help improve profitability. The company expects U.S. & Canada sales to go up by 5%, and Western Europe sales to go up by 6% in 2013.
The company is trading at a future multiple of 11x.The earnings are expected to grow by 13% in the next five years on an annual basis. With a solid dividend yield of 2% and future growth expected from expansion in product range, the stock is expected to be a buy.
Disclaimer: 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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.