Right now, the heavy truck industry is charging along at high speed, right?
Orders are strong, and top operators like Motley Fool Stock Advisor recommendation Paccar (NASDAQ:PCAR) are seeing good leverage in the business. The hitch is the big yellow sign saying, "Caution, 2007 approaching." That's when new pollution standards take effect (standards that aren't necessarily good for the trucking operators), and so many buyers have been pushing their orders to rebuild their fleets ahead of that change.
So the question now is, "How bad will 2007 really be?"
Although this quarter's earnings at Paccar don't really speak to the future, they were nevertheless solid and suggested that this is a company built to last. Revenue was up 15%, and although gross margins were essentially flat, tight operating expense control led to 20% operating income growth. And once again, the company produced ridiculous returns on equity and capital (and I mean that in the best possible way).
So what about 2007? Although some have suggested that the U.S. truck market could drop as much as 40% in 2007, Paccar's management's guidance was more on the order of a drop of 15% to 20%. It's hard to run a company well without knowing your business and your market, so I'm certainly inclined to hope it's right.
And there are a few other points to consider as well. Just because the U.S. may be down, that doesn't mean the rest of the world will be -- and Paccar has a decent chunk of business beyond U.S. borders. What's more, financing and after-market parts are now also bigger parts of the pie. I'm not saying that Paccar is going to post roaring growth in what will be a tough environment; I'm just saying things aren't going to completely fall apart.
Also, don't forget that the U.S. economy is strong, and there's likely only a couple of months left to order trucks and get them with 2006 engines. In other words, DaimlerChrysler (NYSE:DCX), Navistar (NYSE:NAV), Volvo (NASDAQ:VOLVY), and Paccar might see some spillover into 2007 just because not every order could be filled in 2006.
Paccar has seen a few cycles since the late 1980s, and yet the stock is up strongly since then -- matching Caterpillar (NYSE:CAT) and handily surpassing most rivals. Even though there's certainly risk in holding these shares through the downswing of the cycle, it's not often that you find such well-run companies. If you can bear the thought of some near-term pain for long-term gain, try to hold on.
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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).
