Heavy-duty truck and equipment manufacturer PACCAR (NASDAQ:PCAR) is coming off a fantastic quarter that saw truck deliveries grow 20%, and profits up 38% from last year. The North American trucking market is finally recovering, with strong sales in much of 2014 that carried over into 2015, with near-record orders at the end of last year and early this year.
PACCAR is set to release second-quarter earnings next week. Let's take a closer look at some of the keys that are driving the company's results.
2015 on track to be another great year
Class eight heavy-duty truck sales are a key segment for PACCAR and its competitors, but also offer some indication of the overall state of the economy in the U.S. and abroad. Historically, North American truck sales of 200,000 per year in this category have been considered "healthy," with 2014's total of 250,000 considered very strong.
On the company's first-quarter earnings call, PACCAR CEO Ron Armstrong said they are expecting North American class eight sales to fall between 260,000 and 290,000 in 2015, and the early results support that. According to one source, orders during the past six months are at an annual rate of more than 305,000 units -- though that rate will decline some as order levels tend to peak at year end/beginning, and slow during the summer.
Last quarter, PACCAR's North American segment increased truck deliveries 31% versus last year.
The European truck market has strengthened a little, as well, and the company saw deliveries grow 9% last quarter. Low fuel prices and generally strengthening economies not named "Greece" are expected to continue. The company said that 3% growth in shipments from and inside Germany -- Europe's industrial and manufacturing powerhouse -- are indicative that growth should be steady.
South America is expected to remain relatively weak, after reporting a 3% decline last quarter, in a market that's expected to decline as much as 10% in 2015. In other words, even in its smallest market -- and one that's in a cyclical downturn -- PACCAR is growing its share of the market.
PACCAR getting a big piece of the pie
While order activity has slowed recently, this is normal for the time of year, and there's a pretty significant backlog of orders in place, with limited build slots open to add new orders. The company delivered 38,300 trucks last quarter, and is projecting that number to increase by 5% to 7% sequentially. If that holds true, it would be a 20% increase in trucks delivered versus last year, in line with the growth from the first quarter.
The biggest growth has been -- and is expected to remain -- the North American market. Last quarter, deliveries to the U.S. and Canada increased 31%, and it's likely that this is the same case for the current quarter. (Mexico isn't grouped in this segment.)
The company's market share increased very slightly last quarter, from 27.2% in 2014 to 27.3% last quarter for class eight, and from 16.7% to 16.9% in the medium-duty market.
Picking up momentum
The truck market has been slowly and steadily improving during the past five years, and 2015 looks like it will finally be the breakout year that many have been expecting. However, there's likely a lot of pent-up demand for years beyond due to the slow recovery. Record levels of shipments so far this year are expected to continue, especially as the U.S. homebuilding industry ramps up, and the nonresidential construction business also continues to strengthen.
Weak oil prices may hurt demand, but the upshot is that it's a major cost saver for the trucking industry. This is likely to help drive a continued rebound in truck sales. It's also great for the average consumer. In other words, the weakness in demand from one segment of customer is more than made up for by the overall economic benefit for PACCAR's customers.
The company recently raised its dividend by 9%, and has steadily increased it since having to lower it during the recession:
However, growth in profits and a steady hand at managing costs have meant that the payout ratio -- the percentage of after-tax earnings paid in dividends -- has actually fallen during the past several years.
The trucking business is likely to remain strong for at least the rest of 2015, if not beyond. The factors that support this include:
- Overall economic strength in North America, primarily the U.S.
- Building momentum in both residential and nonresidential construction, neither of which have yet fully recovered from the recession.
- Lower fuel costs and high shipping demand, which will drive profits to shippers, and create incentive to invest in fleets.
- Several years of pent-up demand that is finally beginning to turn into truck orders.
PACCAR has consistently managed its costs in both growth and weak market cycles, and it's looking like the company is positioned to take full advantage of the ongoing recovery. We'll find out exactly how that's translating to the bottom line in a few days.