Bellevue, Washington-based truck and parts manufacturing behemoth PACCAR (PCAR -0.15%) barreled down the production highway in the first quarter of 2019, much as it did in the previous sequential quarter. The company set both production and financial records in the first three months of the new year. Below, let's dive into the manufacturer's quarterly results, which were released on April 30. Note that in the discussion that follows, all comparative numbers are presented against the prior-year quarter.
The raw numbers
|Metric||Q1 2019||Q1 2018||Change (YOY)|
|Revenue||$6.49 billion||$5.65 billion||14.9%|
|Net income||$629.0 million||$512.1 million||22.8%|
|Diluted earnings per share||$1.81||$1.45||24.8%|
What happened with PACCAR this quarter?
PACCAR achieved record revenue and net income this quarter. It also set a global truck delivery record of 51,500 units, exceeding management's delivery forecast by 300 units.
Truck, parts, and other revenue rose by 15.3% to $6.1 billion. Total segment profit climbed 21% to $716.1 million.
Management noted that the Class 8 (the largest truck class by weight) market in the U.S. and Canada grew by 23% in the first quarter, indicating strong economic conditions and sustained demand.
The company's DAF nameplate trucks continued to boost share in the 16-ton-plus market, capturing 17.1% market share in Europe, a sequential gain of 0.5% over the fourth quarter of 2018.
The Brazilian 16-ton-plus market is expected to rebound by 30% in 2019, with vehicle deliveries estimated at 65,000-75,000 against 53,000 deliveries in 2018. PACCAR aims to benefit from this expansion by gaining new market share; the company is also building a new 160,000-square-foot parts distribution center in Ponta Grossa, Brazil, which it expects to complete in 2020.
Parts revenue set a quarterly record of $1 billion in sales. The PACCAR parts business (which reports within the truck, parts, and other revenue segment) also achieved record quarterly pre-tax profits of $207.6 million. Sales and profits jumped 7% and 8% against the prior-year quarter, respectively.
PACCAR Financial Services (PFS), the company's financing and truck leasing arm, notched a 24% increase in pre-tax profits, to $84 million. The segment ended the first quarter with a fleet of 38,000 owned and leased vehicles and approximately $15 billion in total assets.
As I discussed in my earnings preview, the company anticipated a gross margin of 14.5% this quarter. Actual gross margin exceeded this target by a healthy 0.5%, hitting 15%, partially due to higher truck pricing realization of 3%.
PACCAR continues to invest in next-generation trucks even as it hits sales records via conventional vehicle deliveries. The company observed that its Peterbilt, Kenworth, and DAF nameplate divisions are each currently field testing hybrid powertrain, battery electric, and hydrogen fuel cell trucks with customers in North America.
PACCAR repurchased $32.8 million of its common stock during the first quarter.
In light of record results, CEO Ron Armstrong took some time to translate the benefit of peak operational and financial performance into shareholder terms during the company's earnings conference call. Armstrong discussed the following beneficial metrics with investors on the call:
PACCAR continues to outperform its peers and provide strong operating cash flow for reinvestment in future growth and distributions to stockholders. One key measure where PACCAR [excels is] return on invested capital. In the first quarter, PACCAR achieved a return on invested capital of 25%. And over the last five years, [it's] achieved an annual average return of 22%.
PACCAR has delivered annual dividends of approximately 50% of net income for many years and has paid a dividend every year since 1941. PACCAR has increased its quarterly dividend an average of 11% per year during the last 20 years and raised another 14% in the first quarter to $0.32 per share.
PACCAR doesn't present formal earnings guidance each quarter. Instead, management focuses on industry trends as an indicator of the company's potential performance. During the earnings call, CFO Harrie Schippers relayed that the company has increased its midpoint projection for the U.S. and Canada Class 8 market to 300,000 delivered units in 2019. Schippers also noted that U.S. industrial production growth is expected to hit 2.6% this year.
Both projections bode well for PACCAR. As I explained in my earnings preview, PACCAR has made several capacity investments to increase its manufacturing throughput and thus fully capitalize on industry growth. The heavy-truck and parts markets are exhibiting sustained momentum; PACCAR's forward earnings will depend in part on the rate at which it can meet brisk demand.