It's tough to hold industrial stocks through the ups and downs of their cycles, and investors need to figure out whether they're in it for the long haul with truck builder and Motley Fool Stock Advisor recommendation PACCAR
Results for the company behind brands like Peterbilt and Kenworth didn't go over well with the Wall Street crowd, and that's just magnifying the concerns about what the upcoming decline in orders is going to look like. Sales were up 14% in the quarter, and operating income from truck manufacturing rose 13%, but operating margins were basically flat for the quarter.
The trouble here is that customers are buying new trucks ahead of a change in environmental laws that takes effect in 2007. So while orders are strong now, everybody expects business to dry up to some extent in 2007 before recovering, ahead of still more new environmental rules in 2010. The key questions, though, are: How bad will 2007 be? And: What will the pace of recovery look like?
Certainly, PACCAR won't be going through this alone. The same broad trends are going to affect Volvo
What's more, there's the chance that PACCAR will be able to grow the medium-duty truck business while the heavy duty market sorts itself out, although the medium-duty trucks aren't generally as profitable for the company.
It will take a fair amount of patience to hang onto these shares for the next couple of years. That said, this is a very well-run company that has navigated the ups and downs of cyclical demand before and ultimately came out stronger each time.
For more Foolish thoughts on the big rigs:
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).