Leading medium- and heavy-duty vehicle manufacturer PACCAR (PCAR 0.66%) reported its full-year 2015 and fourth-quarter financial results on Jan. 29, driving the highest revenue and earnings per share in its history. At the same time, the company behind the Kenworth, Peterbilt, and DAF brands maintained strong market share and also increased its profit margins.
But as PACCAR moves forward into 2016, U.S. and Canadian heavy-duty truck sales are expected to decline between 10% and 20% this year, meaning it's likely that sales and profits will slide this year. Let's take a closer look at the company's results from 2015 and what management expects for 2016.
The numbers
Fourth quarter results:
| Metric | Q4 2015 | Q4 2014 | Change |
|---|---|---|---|
| Revenue | $4,355.3 | $5,119.1 | -14.9% |
| Net Income | $347.2 | $394.3 | -11.9% |
| Earnings Per Share | $0.98 | $1.11 | -11.7% |
Revenue and net income in millions. Data source: PACCAR earnings release.
As you can see above, slowing truck sales have already started affecting PACCAR, with revenue and earnings both falling by double digits in the fourth quarter. With that said, it's worth noting that the fourth quarter of 2014 was one of the best quarters ever for heavy-duty truck deliveries. In other words, it was both a slowing of sales and a very tough comp quarter.
For the full year:
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $19,115.1 | $18,997 | 0.6% |
| Net Income | $1,604 | $1,358.8 | 18% |
| Earnings Per Share | $4.51 | $3.82 | 18.1% |
Revenue and net income in millions. Data source: PACCAR earnings release.
The fourth-quarter slowdown didn't keep PACCAR from breaking 2014's record for revenue or its prior-best EPS of $3.97 back in 2007.
What happened last quarter and in 2015
- PACCAR's U.S and Canadian market share was 27.4%, slightly behind 2014's 27.9% market share.
- Class 8 truck sales in this market for PACCAR came in at around 76,000 units.
- DAF -- PACCAR's brand in Europe, the UK, and some South American markets -- market share was up in Europe to 14.6% from 13.8% in 2014.
- Revenue was down in Europe for the full year, but up in the fourth quarter. Revenue weakness is largely due to foreign exchange.
- PACCAR unit sales in Europe were up 20% in 2015, and 23% in the fourth quarter, and demand is expected to remain strong.
- Heavy truck sales in Europe are expected to be between 260,000-290-000 in 2016.
- "Other," which is primarily South America, remains a soft market due to macroeconomic weakness. Revenue and unit sales are expected to remain relatively weak there for the foreseeable future, though PACCAR is increasing its market share there even in the weak market.
- PACCAR parts recorded its most profitable year ever, recording pretax profits of $556 million, even as revenue slightly declined from 2014.
- PACCAR declared $2.32 per share in dividends in 2015, the most in its history, and increased its quarterly dividend by 9%.
- Including the $1.40-per-share special dividend announced in December (but paid in early January), dividends increased 25% from the year before.
What management said
A lot of people in the trucking industry are expecting heavy-duty truck sales in U.S. and Canada to decline about 20% in 2016, to what would be a still-strong 225,000-230,000 units, while PACCAR is forecasting for a higher 230,000-260,000 truck this year. Two PACCAR executives talked about why they are expecting higher sales this year.
Director of Investor Relations Ken Hastings:
I think the last (freight tonnage) numbers that came out were like the second highest level on record. So, freight activities look good, the estimation for growth for next year for North America is 2% to 3% growth. So, consumer demand is strong. ... Customers are ordering; those that have ordered are ordering levels comparable to what they ordered in 2015. I'd say a little bit of the difference is just that ... the expectations for delivery were they needed them as soon as they could get them. And now, they're thinking a little bit spreading those deliveries out a little further across the year.
PACCAR CEO Ron Armstrong highlighted the company's strength in the vocational segment, which is experiencing strong demand:
And I would add that Kenworth and Peterbilt are very strong in the vocational segment, and construction activity continues to be strong, forecasted to grow once again for residential housing in 2016. And so the vocational segment for us is performing very well, especially with the new products that we're introducing into both Kenworth and Peterbilt.
Maintaining margins can be challenging for manufacturers when production declines as it is expected to do in 2016, but PACCAR expects to see similar margins as last year. Armstrong again, on why:
Our teams are just doing a great job of rigorously managing the cost structure. We, obviously, work very closely with our suppliers to make sure that we're getting our fair share of commodity cost movements. We have great products. The Kenworth, Peterbilt and DAF products are the highest quality and demand premium price in the market. So, as we look at this year, we feel that 2016 will be comparable to our 2015 levels.
On Europe's truck market on track to grow in 2016:
The [European] market was a strong 269,000 units in 2015. Looking at this year, we anticipate that the European above 16-tonne truck market has the potential to expand further, and be in a range of 260,000-290,000 vehicles.
Looking ahead
PACCAR continues to be an industry leader and one of the most profitable truck makers in the world, but this doesn't make it immune from the cyclical effects of demand on its revenues and profits. Furthermore, while the growth in Europe will help offset some of the likely decline in North America, a strong U.S. dollar will limit the benefit there as well.
Uncontrollables like forex and cyclicality aside, management continues to execute on the things it can influence, such as product development, and stringent cost management, and that continues to keep PACCAR's nameplates at the front of buyers' minds and driving market share. Over time, that's been great for long-term investors.
