Will PACCAR Again Be Able to Ride the North American Growth Wave in Q2?

The truck maker came out with flying colors in the first quarter, and looks set to repeat the story.

ICRA Online
Eshna Basu
Jul 29, 2014 at 11:32AM

PACCAR Inc. (NASDAQ:PCAR), a global leader in truck design and production, is all set to announce its second-quarter earnings on July 29. Deliveries were on track with the company's expectations in the last quarter, and further growth could happen this time around. Here's what you need to keep an eye on in the company's earnings report.

Peterbilt 587 truck, Source: Peterbilt

Revenue could get a boost from strong truck sales in North America
Analysts expect PACCAR to post revenue of $4.43 billion in the second quarter, which would mean a 10.5% growth in sales compared with the year-ago period's $4.01 billion. Since the full-year growth is estimated to be 10.20% with revenue valued at $17.57 billion, the engine maker appears to be on the right track as of now.

The maker of well-known truck brands such as DAF, Kenworth, and Peterbilt generated total revenue of $4.38 billion in the first quarter of 2014, growing 11.6% versus the same quarter of last year. The company did brisk business in the quarter and sold 31,800 trucks, keeping up with its predictions. Unit sales rose by 4% compared with the year-ago quarter as truck demand soared across the U.S.

North American truck demand has been riding on two factors: the replacement of aging trucks across the U.S. and Canada, and the increase of construction activity in the U.S. PACCAR expects truck deliveries to expand 8%-10% in the quarter against the first quarter of 2014, which looks achievable as construction activity in the U.S. has been improving with non-residential construction trending upward.

The U.S. auto sector is also likely to manufacture nearly 16 million vehicles in 2014. This is expected to boost the company's parts business, which saw a healthy growth of 9% in the first quarter of 2014.

Industry Class 8 trucks sales in the U.S. and Canada are estimated to be between 220,000 and 240,000 units of the total auto production, which is an impressive rise from the 212,000 units sold last year. 

PACCAR May 2014 Investor Presentation, Source: PACCAR 

In Europe, which accounted for 29% of PACCAR's $17.1 billion revenue in 2013, sales of industry trucks above 16 tons are projected to be in the range of 200,000-230,000 units, which doesn't look encouraging as the market had risen to 241,000 units in 2013. However, in the first quarter of 2014, the truck maker's revenue in Europe had risen 13% as it was able to drive higher prices on Euro 6 emission vehicles, compensating for lower truck deliveries.

PACCAR has its eyes fixed on Latin America as it expects that region's truck market to grow 4% by 2018. The company believes Brazil's performance in the above-six-ton category will remain consistent. In 2013, the market saw sales of 149,000 units, which could stay in the range of 140,000-150,000 units in 2014. PACCAR's newly established Ponta Grossa plant in Brazil, which started production in October, will ramp up output of DAF trucks in the country and taking the total yield for the year higher. 

PACCAR sees 2014 as a "good" year, pinning its hopes on the 2%-3% expected growth of the North American economy and the projected 1% increase in the European GDP. The International Monetary Fund had projected that U.S. economy would rise at a pace of 2.8% in 2014 and escalate to 3% in 2015, hinting that truck demand will sustain for a long time. The global economy is also estimated to grow to 3.9% in 2015, up from the current 3.7%. Growing GDP will positively affect the construction and automotive sectors, which is why a strong possibility of further improvement in truck sales cannot be ruled out.

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Kenworth T880 truck, Source: Kenworth

Earnings expected to go up
Experts predict PACCAR's earnings for the quarter to be $0.89 per share, up from the same quarter last year's $0.82 a share.  The company could report $3.62 earnings per share in 2014, better than $3.30 a share in 2013. In the first quarter of 2014, earnings had grown by a decent 15.6% compared with the year-ago period.

PACCAR has been implementing cost controls to boost profit. In 2013, it saved 7.4% on truck selling, general, and administrative expenses against the same period of the previous year because of lower sales and marketing expenses along with cut costs. As a result, SG&A decreased to 1.6% of total percentage of sales, from 1.8% in 2012.

With the reputation of posting strong net profits for 75 consecutive years, PACCAR expects its gross margin to grow year over year. It is constantly investing in new projects, products, and processes to enhance its performance and reward investors with dividends.

Foolish last thoughts
Strong North American truck demand, increasing construction activity, and the improving economic scenario in the U.S. are expected to favorably impact PACCAR's balance sheet in the second quarter. The company has undertaken cost cuts, which is showing in the numbers. The Street expects a good show from PACCAR in the quarter, and so do we.