Leading North American medium- and heavy-duty truck builder PACCAR (NASDAQ:PCAR) reported second quarter earnings on July 28 and delivered yet another record-breaking result. The highlights:
- Earnings per share of $1.26; up 40% from 2014 and most ever in a quarter.
- 41,600 trucks delivered, up 20% from last year and 9% from first quarter.
- Revenue up 11% to $5.08 billion.
Much like the company's strong first quarter, Q2 is further evidence that 2015 is shaping up to be the best year in the company's history. Let's take a closer look.
North America and Europe driving growth
Truck deliveries in the company's biggest market -- North America -- increased 31% in the quarter while Europe jumped an impressive 26%:
These are the two dominant markets for the company and are expected to remain so for years to come -- especially in the current demand cycle. If there's one weak spot in the company's business, it's South America, which is a large part of the "Other" segment. This market is expected to remain weak this year, with truck sales falling due to economic weakness in major markets like Brazil.
For now, though, the U.S. and European truck markets are expected to generate strong demand for the next several years. PACCAR management -- as well as other industry experts -- are calling for 270,000-290,000 trucks to be delivered in North America this year, up from 250,000 in 2014 and several sub-200,000 years on the tail of the recession. In Europe, the expectation is for 240,000-260,000, also up big from the prior six years of lagging sales.
Yes, the industry has been on the growth side of the cycle since late 2009, but by all indications, there remains a lot of pent-up demand for new trucks after several years of very slow sales, as well as very high shipping volume on both sides of the pond.
While it's important to keep an eye on the demand curve for a cyclical business like PACCAR's and acknowledge that weakening economic conditions will have an impact on sales, demand is still very strong.
One thing to watch
Things are going great with PACCAR, but there is one uncertainty that the company is dealing with. Last November, the European Commission -- which is the trade authority for Eurozone countries -- issued a Statement of Objection, essentially accusing the major truck makers in Europe of price fixing. These are serious charges that most of the industry is fighting, but Daimler, which sells the most trucks in Europe, has already set aside 600 million euros (more than $700 million U.S.) to prepare for potential fines. Some expect total fines across the entire industry to top 4 billion euros, or more than $4.5 billion. PACCAR management says DAF -- the company's primary European brand -- is preparing its response and that any ruling would be subject to appeal. But at this point the company says it's unable to estimate the financial impact.
The company has more than $3.2 billion in cash and short-term securities on hand, so the company is in great shape to deal with the impact of fines without putting the company at risk, but it sounds likely to cost the company, depending on how involved DAF was in the alleged price-fixing scheme.
The recovery in truck sales has been slow coming, but 2015 is turning into a record-breaking year for PACCAR. But it's important to note that total truck sales in both North America and Europe are still short of levels before the recession, so it's probably too early to call the top just yet.
With that said, PACCAR's financial and operational strength continue to shine, as the company's strong earnings growth this quarter and last indicate. The company does carry more than $8 billion in debt, but even that deserves proper context, as it is largely tied to the company's financing business. In other words, even that debt helps the company make money since it's able to profit on the "spread" between what it pays in interest on the debt and what it charges its customers.
The company also recently increased its dividend 9% to $0.24, a 165% increase since the recession. But even after all the dividend growth, the company will pay out a similar percentage of earnings in dividends in 2015 as it did in 2012 when the dividend was half the current level.
Overall, PACCAR is taking full advantage of the strong rebound in truck sales and putting a huge amount of that growth on the bottom line and back in shareholder's pockets.