There are a lot of interesting things happening in the world right now, but the main event in my mind for international geopolitics is the Canadian Freedom Convoy led by the truckers up in Canada. In response to a vaccine mandate for truckers crossing the border, a group of truckers drove across the country and arrived in the capital city of Ottawa at the end of January. There is a lot of interesting stuff going on up there and I would recommend that investors keep an eye on the situation, especially if you are interested in world politics. If you don’t get anything else out of trucker protests up in Canada (and internationally), the last month has shown how critical the trucking industry is to supply chains around the world.
The supply chain has been a constant topic of discussion in the business media over the last year. PACCAR (NASDAQ:PCAR), as one of the largest semi-truck manufacturers in the world, is poised to benefit over the next decade from continued demand for trucks to keep the economy connected. Almost three quarters of the freight in the US is moved via truck. Paccar has brands around the world, including Peterbilt and Kenworth in North America, and DAF in Europe, Africa, South America, and Asia. Paccar continues to improve fuel efficiency, design, and technology for all its brands.
On the other hand, we have Tesla (NASDAQ:TSLA), a company that needs no introduction. They have a prototype for the Tesla Semi, which has been delayed multiple times. In my opinion, the battery technology available isn’t going to support long haul trucking without massive improvements, and I am skeptical that we will ever see long haul trucks powered by electricity. Paccar has a reasonable valuation, a solid balance sheet, and a good dividend, while Tesla has an extremely inflated market cap relative to the current and future profits of the company. Investors should consider buying shares of Paccar, which are a solid buy under $100.
I’m pretty confident that most of the readers are familiar with Tesla’s business, so I won’t be going into as much detail there. Paccar, on the other hand, is not as widely known because they exclusively serve the trucking industry. The company has been around for over 100 years and is one of many international companies that was born here in the Pacific Northwest.
The majority of their business is the manufacturing and sale of semi-trucks and other related products. The remainder is made up of aftermarket parts and financing services. The company has a history of being the best of breed operator in the industry, with the highest ROIC and best operating margins.
Paccar also has the highest inventory turns in the industry and a significantly lower SG&A expense (as % of sales) than its competitors. You combine all these metrics with a solid balance sheet and a moat with the quality of their trucks and the scale of their operations, and Paccar looks like a solid long-term pick.
I won’t go into too much detail on my personal views on the electric vehicle circus, but I don’t think that the electric vehicle technology has a chance to replace diesel as the dominant fuel source for the trucking industry. The battery technology just isn’t good enough, and personally I don’t think it will ever be good enough to the point that diesel semi-trucks are completely phased out. I think that diesel is the only logical option for any company hauling over longer distances, especially when you consider charging time. That doesn’t mean that there isn’t a place for electric semi-trucks for hauling shorter distances.
Unlike Tesla, Paccar already has several electric truck models on the road today. They recently partnered with Romeo Power (RMO) in 2021 with a 5-year contract for battery power systems. Paccar is also a minority shareholder in Romeo, but they plan to begin production in 2022 for the trucks built on Romeo’s battery platform. They are also working on autonomous driving technology with Aurora (AUR) and FedEx (FDX) but haven’t made any foolish promises on the timeline where the technology will be released.
There are several reasons that diesel trucks made by Paccar are a much better option than Tesla, not the least of which that they are on the road today and have been on the road for decades. As a trucking company, you can either buy rigs from a company that has a proven track record and continues to innovate, or you can pay up front for an unproven prototype.
This is basically the same idea as the full self-driving (or as some people like to call it, fraudulent self-driving). You get to pay up front for something that has been one or two years away for at least three to four years. In the middle of 2019, production for the Semi was projected to begin at the end of 2020. At the beginning of 2021, Musk announced that it would be delayed until the end of the year. Later in the year, Musk admitted that production wouldn’t start in 2021 and was more likely to slip into 2023. This could be possible, but given the recent history, I think it's far more likely that we will see further delays. My guess is that production will begin in 2025 (just an educated guess), but I will be keeping an eye on it to see if things change in a meaningful way on that front.
This section will certainly be unpopular with Tesla bulls. I’m sure that many of you might have a Tesla, or have friends or family that own a Tesla, but I’m more concerned with what the company and the shares will do. Most investors view ESG as sunshine and rainbows, but I’m not one of them. Just because Tesla is the ESG crowd’s poster boy doesn’t mean that they will actually be able to create electric vehicles that will dominate the automotive market in a decade. In my opinion, the company has survived this long due to low interest rates, government subsidies, questionable business practices, and massive equity issuances.
In a risk off period where interest rates are likely to increase, shares have significant downside from the current price. I’m also not a huge fan of what I have seen over the last year with rampant insider selling and the compensation structure for the company. The incentives are tied to revenue and there have been several lawsuits against the company for the CEO incentive structure, the going private circus, and even racial discrimination.
I haven’t followed it closely like many bulls or bears, but I know enough about Tesla that I’m not interested in owning it, especially at a $953B market cap. I’m aware that Elon Musk is today’s cult of personality in the business world, but too many investors are willing to buy the idea that Tesla is going to usher in the EV age without understanding how to value the underlying business. If you want to buy a stock because the price is going up, that’s fine, it’s just not how I operate.
Paccar and Tesla are on opposite ends of the valuation spectrum. Paccar is currently trading at 17.05x earnings, which is just underneath the average multiple of 17.1x. I think this definitely qualifies Paccar as a wonderful company at a fair price. The company also pays a dividend. The yield says 1.5%, but it’s hard to pinpoint exactly what the dividend yield will be in 2022. The company typically pays out a smaller quarterly dividend with a larger dividend in December each year. For example, Paccar paid out a dividend of $0.32 and three dividends of $0.34 for the quarterly payouts and then paid $1.50 in December for 2021. That works out to a 3% yield at the current price just under $95, and I’m assuming we will see a larger December payout in 2022.
Tesla, as many of you are aware, is valued using the hopes and dreams of Silicon Valley tech bros. I won’t even bother including the Fast Graphs because it just hurts my eyes to look at it. Yes, Tesla is growing revenues at a significant pace. Yes, Tesla recently turned profitable. However, when you look at the growth expectations that are already baked into the share price, I just don’t see things ending well for investors buying shares of Tesla at current prices.
The current market cap of $953B just doesn’t make sense to me based on current and future profits. According to Fast Graphs, the blended price to earnings for Tesla is 128x. When you look at the industry as a whole, you have to believe that Tesla is going to have a near monopoly on the automobile industry in a decade to justify Tesla’s current price. I’m not in a rush to short Tesla because I have seen what happens when speculators start buying weekly call options, but what goes up must come down, especially if the fundamentals don’t justify the performance of the shares.
I’m bullish on Paccar in the short to midterm, but very bullish on Paccar over the next 5 years. Tesla could continue its ridiculous run, but I have no interest in being the man without a chair when the music stops playing on that one. Some investors might disagree, but I think diesel is going to be the fuel of choice long term for the trucking industry. Even if battery technology improves, Paccar has a head start on Tesla with the electric trucks they already have on the road.
When I evaluate companies, I try to zoom out and make educated guesses on what the next 3 to 5 years will bring for the company, its industry, and other factors that might come into play. For Paccar, I think we will see continued demand for their trucks, and they are the best operator in the space today. Tesla might have the flashy electric semi-truck prototype, but Paccar has electric rigs on the road today. For long-term investors looking for a way to grab an important piece of the global supply chain, Paccar might be an ideal choice. Shares are a solid buy under $100 and I think investors buying today are likely to be rewarded with double digit returns over the next 3 to 5 years.
I would be fascinated to hear your thoughts. Feel free to leave a comment below.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in PCAR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.