Is PACCAR the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if PACCAR (Nasdaq: PCAR  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at PACCAR.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (3.3%) Fail
  1-Year Revenue Growth > 12% 43.6% Pass
Margins Gross Margin > 35% 13.4% Fail
  Net Margin > 15% 5.6% Fail
Balance Sheet Debt to Equity < 50% 101.4% Fail
  Current Ratio > 1.3 1.83 Pass
Opportunities Return on Equity > 15% 13.3% Fail
Valuation Normalized P/E < 20 20.99 Fail
Dividends Current Yield > 2% 1.9% Fail
  5-Year Dividend Growth > 10% (0.1%) Fail
       
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With only two points, PACCAR looks like it's stalled out in a flash flood. But although the truckmaker has suffered in a tough environment that has threatened the entire trucking industry, there've been several signs more recently that things have started to turn around.

PACCAR makes 18-wheelers and other commercial trucks as well as the parts that maintain them. In a strong economy, trucking typically sees a cyclical upswing, supporting PACCAR's financial results. But during the recession, PACCAR suffered as a combination of lower demand and high fuel costs pushed transportation toward railroads like Union Pacific (NYSE: UNP  ) , CSX (NYSE: CSX  ) , and Canadian National Railway (NYSE: CNI  ) .

But as the economy has recovered, so, too, has the trucking industry. Despite the high-profile troubles that YRC Worldwide has gone through, many better-backed trucking companies, including Heartland Express (Nasdaq: HTLD  ) and Knight Transportation (NYSE: KNX  ) , have benefited greatly from increases in tonnage transported. Those trends all favor PACCAR, as these companies need new trucks.

Expectations are now high for PACCAR, and the company disappointed back in July when it announced earnings that more than doubled from year-ago levels but still fell short of analyst projections. With shares at fairly lofty levels -- more expensive than rival Navistar (NYSE: NAV  ) on an earnings multiple basis -- PACCAR needs to see continued growth to justify its current valuation. If it gets that growth, it could easily climb out of the basement and up toward perfection quite quickly.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add PACCAR to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Heartland Express. Motley Fool newsletter services have recommended buying shares of Canadian National Railway and PACCAR. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 02, 2012, at 4:06 PM, gs271 wrote:

    Given I like the lower part of the article, why post tests which you somehow admit are completely worthless! : )

    - Fix 5 year growth rates:

    Just a slight hint ... we just had an economic crisis?

    -Fix % for margins:

    heavily depends on the industry

    - debt to equity

    I agree there is a maximum of acceptable debt, so this one is the most reasonable. I think 50% debt/equity is tricky to find these days though, requiring debt < 33% of total capital

    -13.3 % is a good ROE..

    These criteria need to be relaxed and more qualitative and other quantitave factors need to be considered

    P/E is currently lower,

    and some simple facts:

    1) the company builds great trucks. That's important! in this industry buyers don't need a brand or lifestyle. all i want to know as an industrial buyer is : price, fuel consumption, reliability, life time, cost and availability of spare parts etc & depreciation. Who ever masters this gets the contract.

    So look out for modern production facilities, track record of good products, fuel consumption awards etc.

    So industrial metrics are vital for PACCAR, not just the general financials.

    2) As you mentioned Paccar competes in an industry that is heavily macro dependent... so e.g. in 2009 it was an easy buy for a long term investor.. Now I think they are very well positioned to benefir from emerging economies, especially in the americas. But the same goes for other emerging economies.

    3) There are only so and so many truck producers, and I have to research the giant Daimler further, but it seems their American subsidies are quite antique product wise. Regarding the other players, I am confident Paccar can compete with Navistar etc.

    It therefore seems clear to me that there is more growth potential for Paccar both from market share and market growth.

    4) I very much like their management and their reporting style. They don't seem to hide a thing. It's also harder to hide numbers and facts, when it is such a clear product you produce.

    The annual report is full of useful information and numbers not lots of vision & dream nonsense : ) That shows confidence.

    And regarding financials, like I said they must be read differently. Interest Coverage of >5x,

    71 consecutive profits. But I agree, the company has a bit much debt by now.. From Q3 Report : $16.4bn of assets, with liabilities totalling $10.7bn.. that leaves a mere 1/3 of total capital equity... That is really on the limit, even for a quality company.

  • Report this Comment On January 02, 2012, at 4:14 PM, gs271 wrote:

    by the way, interest coverage was 4 for the year 2010, 5 for Q4 2011 just as a remark

    also see

    http://www.fool.com/investing/dividends-income/2011/09/30/pa...

    this gives me an idea for a new metric on dividends by the way: yield / FCF payout ratio : ))

    a high yield, and a low payout ratio is a nice combination

Add your comment.

DocumentId: 1556143, ~/Articles/ArticleHandler.aspx, 4/16/2014 7:24:51 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement