You may not have heard of PACCAR, but it is a member of the S&P 500 and “the world’s No. 2 big-rig truck manufacturer after DaimlerChrysler’s Freightliner subsidiary” (Barron’s). According to Morningstar, PCAR is “the premier truck manufacturer in the industry.” Its brand names may be more familiar to you: Peterbilt, Kenworth, DAF, and Foden.
The company’s 10K claims that PACCAR won 24.6% of retail sales in the Class 8 (heavy duty) truck market, and 9.7% of Class 6 and 7 (medium duty). Its DAF subsidiary commands 12.8% of the Western European heavy duty market and 8.9% of the light/medium market. There are some niches that PACCAR really dominates—it has 60% of the high-horsepower market in Australia and 52% of the heavy-duty tractor market in Mexico.
Despite the impressive market share and name brands, the valuation is pleasantly reasonable. The PE is 11.89 trailing, and single digit—9.36—looking forward. EV/EBITDA is at 7.92, and EV/Revenue is 1.18. That said, PCAR has traded for long stretches in single digit PE land, so there’s an argument that it’s not as cheap as it appears.
Finding the right comps can be tricky because other truck manufacturers, such as DaimlerChrysler (DCX) and Volvo (OTCPK:VOLVY), aren’t pure plays. Navistar (NAV) is more of a special situation and even Oshkosh Truck (OSK), who only makes trucks, is not a perfect comp because they’re really in specialty lines (eg firetrucks). Our conclusion though is that truck manufacturers have historically been awarded low PE’s—another reason to take the valuation with a grain of salt.
The returns and margins won’t knock your socks off, but they are quite respectable, especially given the industry. On a trailing basis, the profit margin is 7.73%, the operating margin is 12.10%, and ROA and ROE are 8.48% and 27.33% respectively. Compare that to other vehicle manufacturers to appreciate the numbers.
The company has been profitable for 66 consecutive years (yes, 66) and sales and profits have grown particularly nicely for the past four fiscal years. How old is the company? PACCAR traces its predecessors to the Seattle Car Manufacturing Co. which was formed way back in 1905. Here’s how the numbers look for the past 4 years (millions of dollars):
2005 looks set to continue the favorable trend. For the third quarter of 2005, PACCAR’s net income jumped 24% to a record $304.8 million The company’s Q3 2005 results were the 15th consecutive quarter in which the company earned higher net income than the comparable prior year period. On a nine month basis, PCAR reported record net income of $820.3 million (a 23% increase compared to 2004) and sales of $10.42 billion (a 27% increase year over year).
Management treats its shareholders well. The company just completed a 5 million share repurchase program only to authorize the repurchase of an additional 5 millions in late October. PCAR has a long history of buying back its shares. Shares outstanding were 174.9 million at 12/95 and 169.3 million at 9/05 with many repurchase programs in between.
Money is also returned to shareholders in the form of a 1.3% dividend, not to mention a special dividend that management has been paying out once a year. On a trailing basis factoring in last year’s special dividend, the yield is about 4%. An extra dividend has been paid 11 times in the past 10 years.
Over 6% of shares are held by insiders, so management’s incentives are matched with shareholders’, at least in this regard.
Unlike other vehicle manufacturers that are saddled with debt, PCAR has an enviable balance sheet. The company reports in two segments, “Truck and Other” and “Financial Services.” Looking at the Truck and Other segment total liabilities at 9/05 were $2.8 billion, compared to current assets of $3.2 billion (and over 52% of the current assets were cash, equivalents, and marketable debt securities).
As stodgy as a truck company may sound, PACCAR invests heavily in technology. Six sigma, RFID, and tablet PC’s are common words in PACCAR offices. President George W. Bush recently announced that PACCAR would receive a National Medal of Technology, the country’s highest award for innovation. The medal acknowledges PACCAR’s global industry leadership in dramatically reducing fuel consumption in lightweight vehicles.
IndustryWeek magazine also named PCAR a top 50 manufacturer and InformationWeek magazine recently recognized the company as a leading information technology innovator in the automotive category.
Morningstar wrote in a July 2005 note after a visit to the company’s Renton, WA facilities, “The two occurring themes we observed were the critical roles that technology plays at every stage of the design, production, and support processes, and the success of the firm’s culture of continuous improvement, fueled by a drive to cut costs and improve efficiency.”
We view the company’s technology, scale, brand, and balance sheet as strong competitive advantages. The industry is cyclical to be sure, but the products are far from commodities in our view. Whether or not buying now is buying at the peak of the cycle is something to think about.
The company’s pension plans do not face significant deficits, there are no major lawsuits outstanding, and the company is not dependent on any one customer.
If PCAR interests you, check out the LEAPs as an alternative to buying the shares. They’re not expensive, although you won’t get the dividends until you exercise them.