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3 Crucial Updates You Can’t Miss in PACCAR Inc.'s Q2 Earnings Report

By Neha Chamaria – Jul 20, 2016 at 5:27PM

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With the trucking markets slowing down, what lies ahead for PACCAR Inc.?

Brexit could hit PACCAR's DAF nameplate. Image Source: PACCAR Inc.

With orders for heavy-duty trucks in North America hitting near six-year lows in June, all eyes are on PACCAR's (PCAR 0.63%) second-quarter earnings report, scheduled for release on July 26. As a leading truck manufacturer, PACCAR's numbers -- particularly truck delivery and order rates -- can not only provide insight into the health of the trucking industry, but also act as a precursor for investors in engine maker Cummins (CMI 0.28%), which counts PACCAR among its key customers and is set to report its Q2 numbers early next month.

Given the weak end-market conditions, it's safe to expect a weak quarterly report from PACCAR. Analysts project its Q2 sales and earnings per share to dip around 13% and 19%, respectively. However, investors shouldn't stop at PACCAR's sales and profit numbers, or outlook about North America, as there are several other factors that could affect the company's profits going forward. Keeping an eye on the following three updates, in particular, in the upcoming earnings report should be helpful.

Will PACCAR have to cough up more fines?

PACCAR's first-quarter loss took investors by surprise, but it had nothing to do with the company's fundamentals. The European Commission has been investigating leading truck makers, including PACCAR, for some years for price fixing. The judgement was not favorable and, accordingly, PACCAR recorded a charge worth $942.6 million in the first quarter for fines, which hit its profits.

Fortunately, investors needn't expect a rerun in PACCAR's second quarter as the final penalty just announced by the European Commission is within the $942.6 billion that the company set aside. However, PACCAR may still have to pay damages to trucking operators, which could run into big amounts. Investors shouldn't miss any information that management may provide in PACCAR's upcoming earnings call for the simple reason that any such payout will pressure the company's bottom line at a time when sales are already soft.

Negative affects of Brexit?

Amid the sluggishness in the North American trucking markets, PACCAR is betting on Europe for growth. Its nameplate DAF achieved record market share of 16.6% in the first quarter as truck deliveries climbed 30% year over year.

Unfortunately, the Brexit vote has added a great deal of uncertainty to growth in the U.K. and the European Union, and the economic relations between the two. The International Monetary Fund has already slashed its growth forecast for U.K. for 2017. That bodes ill for PACCAR as Europe is its second-largest market after the U.S., with the U.K. being DAF's primary market.

Needless to say, investors should look for any warning signs in PACCAR's Q2 earnings report, especially order rates from Europe and management's viewpoint about Brexit's impact on the company. While I'm still expecting PACCAR to deliver strong numbers from Europe for Q2, it's the long-term implications that worry me, and that's the area investors should also focus on.

What are PACCAR's plans for its engines business?

One of the key takeaways from PACCAR's first-quarter earnings call was the progress of its engines business. PACCAR is aggressively replacing outsourced engines -- many of which come from Cummins -- with its own. During the first quarter, nearly 46% of PACCAR's trucks ran on its own engines, compared to 42% in the fourth quarter of 2015.

While management mentioned during PACCAR's Q1 earnings call that it is targeting 80%-85% penetration in the long term, investors should look for further clarity in the upcoming call, especially on whether the company is also looking to sell its engines to other truck manufacturers. That could be a big growth catalyst for PACCAR in the years to come.

All said, investors should look beyond PACCAR's quarterly numbers when it reports its Q2 earnings and focus on how it plans to tackle challenges, as that'll hold the key to its growth.

Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cummins 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 Motley Fool has a disclosure policy.

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Stocks Mentioned

Paccar Stock Quote
Paccar
PCAR
$104.26 (0.63%) $0.65
Cummins Stock Quote
Cummins
CMI
$246.32 (0.28%) $0.68

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