Please ensure Javascript is enabled for purposes of website accessibility

Cummins, Paccar, and Navistar: Why They Surged

By Lee Samaha – Feb 26, 2014 at 3:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stocks with exposure to the trucking industry like Cummins, Navistar, and Paccar have surged over the last year or so, and here is why.

If there is such a thing as an investing based game show, then heavy engine manufacturer Cummins (CMI 1.92%) is a strong candidate for a trivia question. The stock is up over 30% in the last year, after recording flat revenue and an operating income decline of 6.7% in 2013.  In addition, customers in its truck engine segment Paccar (PCAR 1.58%) and Navistar (NAV) (also a rival) are up around 40% and 50% respectively. What exactly is going on, and can it continue?

Cummins, Paccar, and Navistar
The answer to the trivia question above isn't as obvious as it may seem. A surging stock market has certainly helped pull these stocks higher, but they also rose for some stock-specific reasons. The main thing they have in common, is that the outlook for the North American trucking market is better than in 2013. Investing Fools will already know how aluminum producer Alcoa (AA) views the global heavy truck and trailer market in 2014. While, Alcoa's forecast of 1%-5% growth in the segment might not look exciting, it's a lot better than the double-digit declines recorded in 2013.

Starting with Cummins, a breakdown of 2013 segmental earnings before interest and taxes, or EBIT.

Source: Company presentations

Its engine segment manufactures diesel and natural gas engines for heavy- and medium-duty truck manufacturers. Paccar is its largest customer, and represented around 12% of its total company sales in 2013. Cummins also has long-standing heavy-duty engine supply agreements with Navistar and Volvo, and supplies mid-range engines to Daimler, Navistar, and Ford. In addition, Chrysler is a key customer for its light-duty engines.

The bad news is that Cummins predicts that industry on-highway engine units will actually decline overall in its key geographic markets in 2014. However, the good news is that it generates around 60% of its sales from the U.S. and Canada, and its NAFTA region heavy- and medium-duty units are forecast to grow 8.3% and 7.1%, respectively. For reference, Cummins currently generates 27%, 22%, and 13% of its total engine sales from heavy-, medium-, and light-duty engines, respectively.

Source: Company presentations

Moreover, Paccar (which has 28% of the U.S, and Canadian heavy-duty-truck market) forecasts that U.S. and Canadian heavy-duty-truck sales will be 210,000-240,000, compared to Cummins' forecast of 236,000 for NAFTA. Paccar also forecasts European industry truck sales will be higher this year as well. Paccar's story is relatively simple: Truck sales are likely to be stronger this year.

Navistar's improvement has come about partly due to the anticipation of better market conditions, but it's also due to some stock-specific issues. Navistar lost market share to Paccar in recent years, partly as a consequence of the troubles it had with its exhaust gas recirculation technology that fell foul of emission standards. However, Navistar has appreciated on the hopes that its cost-cutting measures (including cutting plants and buying engines from Cummins) will result in a turnaround at the company.

Cummins squeezes out growth
Cummins' management forecasts 4%-8% overall revenue growth this year, but it's far from a simple matter of better truck engine demand. Investing Fools should bear three points in mind.

First, according, to the management on the conference call, 2.5% (of the mid-point of guidance of 6% revenue growth) will come from the acquisition of distributors, 2% is due to emissions regulations and new products, only 1% from market growth, and the rest from market share gains and pricing.

Second, its revenue growth in the first half is forecast to be "closer to 4%" with the "second half of the year closer to 8%". Given, that the first quarter is likely to be the low-point, Fools should not panic if the first quarter comes in at a slower pace than the 4%-8% forecast for the year.

Third, certain areas of its business remain weak. For example, weakness in emerging markets hurt power generation sales in 2013, and its forecast for power generation sales is for a range of -3% to 3%.  Moreover, the engine segment growth is only expected  to grow by 4%-6%, because demand from areas like mining and marine continues to be weak.

The bottom line
On a positive note, a combination of favorable market conditions (emissions regulations and some North American trucking growth) and its own execution (increasing truck engine market share and acquiring distributors) means that analysts have earnings per share growing 12% and 23% for the next two years.

On the other hand, there are no major changes in emission standards in 2015, so Cummins can't always rely on regulations to spur growth. Also, a lot of its growth is coming from internal execution and winning market share, trucking is always a cyclical industry, and its power generation segment looks weak. On a forward P/E ratio of 16.5 times earnings, the stock looks fairly valued.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Cummins and Paccar. The Motley Fool owns shares of Cummins and Paccar. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Navistar International Stock Quote
Navistar International
Cummins Stock Quote
$251.16 (1.92%) $4.74
Paccar Stock Quote
$105.91 (1.58%) $1.65
Alcoa Stock Quote

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.