PCCAR: Emissions Fears Priced Into Stock (PCAR)

We first wrote about truck maker PACCAR (PCAR) in late November of last year (read the post). Despite some ups and downs in between, the stock closed Friday essentially flat since we first profiled the company.

PCAR is now priced at 11 times trailing earnings and 7.9 times EBITDA. The balance sheet is solid with $2 billion in cash and little debt in the manufacturing division. The dividend yields 1.6%, ignoring any special dividends the company might pay. (Yahoo Finance)

Barron’s said PACCAR “is probably one of America’s best-managed companies, yet it remains unknown to most investors.” (“King of the Road: Why Paccar Won’t Crash,” by Andrew Bary, 5/23/05).

Morningstar is also a PCAR fan. Here are a few quotes from Morningstar analyst Ben Butwin’s report:

* “PACCAR is the cream of the crop in the truck manufacturing industry”

* “Like a diamond in the rough, PACCAR consistently outshines it peers”

* “PACCAR is one of the most technologically advanced companies in the world, regardless of industry”

Although the stock price hasn’t moved much since our November PACCAR profile, company results have actually improved. Here are some excerpts from this past Tuesday’s earnings release:

* “PACCAR achieved record revenues and net income for the first quarter of 2006"

* “PACCAR earned $342.0 million for the first quarter 2006, an increase of 25 percent compared to the $274.0 million earned in the first quarter of 2005.”

* “First quarter net sales and financial services revenues were $3.85 billion versus $3.33 billion for the first quarter of last year.”

* “The PACCAR Board of Directors approved an increase to the regular quarterly dividend from $.25 per share to $.30 per share.”

* “PACCAR has raised its regular quarterly dividend nine times in the last ten years, an increase of 435 percent over the decade. PACCAR has paid a quarterly dividend every year since 1941.”

* “In a White House ceremony on February 13, 2006 President George W. Bush presented PACCAR with the National Medal of Technology, the nation's highest award for innovation.”

* “During the first quarter of 2006, PACCAR repurchased 2.5 million of its common shares ($175 million invested) under a five million share program announced on October 25, 2005.”

Analysts expected EPS of $1.82; PCAR reported $2.02. Analysts expected sales of $3.48 billion; PCAR reported $3.85 billion.

We’re not sure what else shareholders could have wished for in an earnings report. How did the market react to this stunning outperformance? It sent PCAR’s shares down on Tuesday, followed by a 2.88% drop today.

We’re not sure what the market doesn’t like about PCAR. Last quarter when the company reported what were then record-breaking numbers, we expressed our confusion in this post as to why the stock dropped 6%.

Our best guess as to the bear’s case against PCAR is fear that stricter emissions laws taking hold in 2007 are driving 2006 sales at the expense of 2007 sales. This is a legitimate concern. In the conference call CEO Mark Pigott warned the heavy duty truck market could be down 15-20% next year. That said, it seems that this fear is already priced into the stock. We also don't view the new emissions laws as of major long term significance. The world will still need trucks, and those with long term investing strategies might find the PACCAR story of interest.

Morningstar wrote, “We’d be more than comfortable holding this company’s shares for the long haul.” We agree.

What do you think of PCAR as a long term investment? We value hearing our readers' opinions. Please post your thoughts in the comments. No registration is required.