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Will PACCAR Pack a Punch in This Quarter's Earnings?

By Asit Sharma - Apr 11, 2019 at 5:04PM

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The industrial-truck manufacturer has strung together a few vigorous quarters due to robust commercial demand. Will beneficial conditions persist?

Heavy-duty truck and parts manufacturer PACCAR (PCAR 0.74%) reports first-quarter 2019 results at the end of the month, on April 30. After celebrating a year of record annual revenue and net income, can PACCAR continue to post heady results? Let's review key numbers and themes that investors should watch in the upcoming report to gauge the company's success

1. Meeting management's guideposts

As is customary, shareholders should first review results against management's guidance for the quarter. PACCAR doesn't provide a detailed financial outlook, choosing instead to forecast a handful of benchmark numbers each quarter that are indicative of the company's overall health.

During the company's fourth-quarter 2018 earnings conference call, CEO Ron Armstrong advised investors to expect truck deliveries to increase by 15% over the prior-year quarter's total of 44,500. This target, if met, will equal roughly 51,200 deliveries, for a sequential improvement of 1.5% against the fourth quarter of 2018. 

In addition, Armstrong forecast that PACCAR's gross margin would advance sequentially from 14.2% in Q4 2018 to 14.5% in the first quarter of 2019. This will represent a slight year-over-year drop from the 14.8% gross margin achieved in the first quarter of 2018.

Management also expects part sales to exceed the prior-year period's sales of $940 million by roughly 5%-8%.

2. Capacity investments should help maintain profitability

In 2018, PACCAR's pre-tax income surged 29% year over year, to $2.2 billion. This improvement was due largely to PACCAR's ability to ship a record number of trucks and parts with relative production ease.

A row of white commercial heavy trucks parked side by side.

Image source: Getty Images.

Continued efficient throughput will sustain PACCAR's profitability as it takes new orders and works off a record $14.7 billion backlog. The company is actively investing in additional capacity in its parts business by expanding its parts production prowess in Las Vegas and Brazil.

PACCAR is expanding its truck-manufacturing capacity with new investments in machining equipment to produce the successful PACCAR MX engine. Current-year capital expenditures will also include additional square footage at plants worldwide and a new truck-painting facility in Chillicothe, Ohio.

Expect management to discuss production-capacity investments on the company's upcoming earnings call, in order to keep investors satisfied that PACCAR can keep up with surging orders without impairing margins in 2019.

3. Financial-services results are always vital

Part of PACCAR's recent success is due to its ability to offer Kenworth, Peterbilt, and DAF truck dealers and their customers financing on vehicles. The financing business is highly lucrative for PACCAR: Last quarter, the company generated $87 million in profit on $347 million in revenue, which equates to segment operating profit of 25%. The $87 million segment bottom line also represented a 21% increase in profit over the fourth quarter of 2017.

Growth in this segment enables PACCAR to sell more vehicles, but the company has been careful to maintain a fairly solid balance sheet in enabling this relationship. At the end of last quarter, the financial-services segment held $14.4 billion of owned and leased assets against $11.2 billion in debt. 

Shareholders should watch for continued profitability in this segment, as it's both an important component of the company's bottom line and an indicator of the relative health of total truck sales.

4. Industry trends and potential early warning signs

Over the last few quarters, PACCAR has enjoyed robust demand from tight capacity in the truck freight market, which has caused transportation companies and 3PL (third-party logistics) firms to add to their fleets. 

However, as I discussed recently in my earnings preview of 3PL carrier J.B. Hunt Transport Services, long-distance truck shipment rates fell in February by 1%, a significant one-month drop, and the second decrease in as many quarters. This freight pricing trend reversal is significant because it may confirm what some industry watchers suspect -- that a two-year trend of scarce capacity may be waning.

If the freight industry has indeed begun to normalize its supply of available heavy trucks, this will have an impact on truck manufacturers like PACCAR at some point in 2019. Of course, it's doubtful that PACCAR will feel any immediate impact, given its current robust order book and massive backlog.

Nonetheless, it will be interesting to see if management continues to exhibit as optimistic a view of the industry as it has over the past few quarters. For the first time in a while, investors could possibly hear a few notes of caution over PACCAR's future order flow this quarter.

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