PACCAR (NASDAQ:PCAR) must feel like it's on the roller-coaster ride of its corporate life.
PACCAR is hardly a household name, but truckers know its Kenworth and Peterbilt truck brands well. The company is known as an innovator, and it builds custom rigs with an emphasis on quality, modeling itself after Dell (NASDAQ:DELL) and its built-to-order process.
Since 2001, PACCAR has been on a long, steady run-up, with revenue rising from $6.1 billion in 2001 to $16.5 billion in 2006. Net income rose steadily as well, starting at $174 million in 2001 and climbing to $1.5 billion in 2006.
But this year, things have changed. The first two quarters of 2007 brought declining revenue and net income.
Looking down from the top
PACCAR's third quarter continued that trend. The company reported on Wednesday that its revenue plunged nearly 13%, while net income fell more than 25% to $302.3 million.
Yet as bad as that may seem, investors had expected worse. On a per-share basis, net income fell to $0.81, down from $1.07, but $0.04 higher than analysts had expected. Most of PACCAR's $0.04-per-share earnings surprise came from the company's financial services group, which saw revenues jump 27% and pre-tax income rise 10%. A share buyback also helped boost the per-share result. The stock jumped more than 11% on the news.
Paying the price
Last year's run-up explains part of the mixed results. With new U.S. emissions standards taking effect in 2007, a lot of customers made purchases last year, so that they wouldn't have to buy trucks with cleaner but unproven engines this year. So analysts expected 2007 to be especially disappointing.
And it was, particularly in the U.S., where revenue dropped 47%. Yet PACCAR's competitors also felt the pinch. Daimler's (NYSE:DAI) Freightliner truck unit reported a 19% decline in sales, while AB Volvo (NASDAQ:VOLV), which makes Mack Trucks, reported a 50% drop in North America.
Europe was a different story. PACCAR said revenue there jumped 46%, and both Volvo and Daimler reported strong sales there as well. All three benefited also from strength in Latin America.
What's to come
So has the roller coaster bottomed out for PACCAR and the truck market, or does gravity still have more work to do? In North America, a recovery is likely in 2008; the company's management said it expects the market to rebound amid normal replacement demand. However, a recession could throw a monkeywrench into plans for a full recovery. Meanwhile, strong demand in Eastern Europe and Russia will likely continue, with Goldman Sachs projecting continued strong demand through 2010 resulting from economic reforms.
PACCAR's dividend history also supports the stock. The company has paid a dividend since 1941, and it's boosted that payout in five of the last six years. That steady payout, combined with the company's strong competitive position and the potential for a recovery, could explain why buyers were so enthusiastic yesterday -- as well as making the stock attractive both to growth investors and to those seeking dividend income.
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