"No good deed goes unpunished."
Medium- and heavy-duty truck and truck parts manufacturer PACCAR (NASDAQ:PCAR)reported one of its best quarters ever on October 27, and the company's stock continued its recent sell-off, falling more than 6% following the earnings release and conference call. That put shares of PACCAR down 25% since the beginning of the year:
The year 2015 is shaping up to be one of the best that the company has ever had, but the decline in revenue from last year's quarter has the market spooked. What gives? In short, there's a disconnect between the company's results so far this year and a stock market that's become convinced that heavy-duty truck sales are set to dry up after recovering strongly.
Let's take a closer look at PACCAR's results. The stock has been beat up this year, but the business is performing exceptionally well.
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The decline in revenue, along with murmurs throughout the industry that heavy-duty truck sales are set to decline in North America, have spooked investors. Diesel engine manufacturer Cummins (NYSE:CMI) also reported earnings on October 27, and reported that sales of engines for heavy trucks declined 9% in the third quarter. PACCAR makes a lot of its own engines, but Cummins is a major supplier of engines to the company.
Cummins also announced that it would be making some restructuring moves, starting with the elimination of 2,000 U.S. white-collar jobs. Like PACCAR, Cummins stock has been punished this year, down more than 23% as of this writing. And while PACCAR doesn't have the exposure to mining and Asia that Cummins does, both are major industrials, with big exposure to cyclical factors outside of company control.
ACT Research, a leading reporter of automotive and trucking data, reported that North American Class 8 truck orders in September came in at 19,400. This was less than the 20,200 orders reported in August, which is typically one of the lowest months of the year. The bottom line is that, after a huge bounce-back period that really began about this time last year, truck orders appear to be cooling off.
What happened in the quarter
While there is some uncertainty about the near term, PACCAR had a solid third quarter.
- Earnings of $1.21 per share were second-highest in company history.
- Revenue in U.S./Canada increased 3% on sales growth; revenue in Europe declined 3% due to currency exchange. Revenue in other markets (primarily South America) declined 22% due to significant macroeconomic factors affecting these markets.
- Global truck deliveries increased 6%, showing the impact of foreign exchange on the top-line results considering the strong margins.
- Repurchased 1.37 million shares for $78.6 million. Board approved new $300 million buyback authorization.
What management said
CEO Ron Armstrong addressed the big concern: The outlook for heavy-duty trucks looking forward. Some estimates are that class 8 truck sales will fall as much as 20% in 2016 -- but Armstrong disagrees, based on the fundamentals of the economy:
Our thoughts are as long as the economy is in that 2% to 3% growth and there is continued strong housing and automotive activity and consumer spending is up 3% or 4% year-on-year, I think the fundamentals of the economy and therefore the effects on the our business I think are all good. So I would agree that 15% to 20% is probably overly pessimistic.
PACCAR's own estimates for U.S./Canada class 8 truck sales next year is between 240,000 and 270,000, which -- depending on where 2015 final numbers come in -- works out to between a roughly 6% and 15% decline from this year's results.
On the other side of the pond, PACCAR is expecting heavy-truck sales to increase 5%-10% in 2016. Armstrong again:
We've raised this year's 2015 forecast for Europe's greater than 16 tonne market to a range of 255,000 to 265,000 units. We expect the strong market conditions to extend into next year. Our 2016 forecast for Europe's heavy truck market is a range of 250,000 to 280,000 trucks.
A concern with businesses like PACCAR, which operate in cyclical industries, is that the company's exceptional margins are going to get compressed if sales do fall next year. Armstrong responded to an analyst question about this, saying that margins could "track volume a little bit," but would be "flattish" compared to 2015 margins.
Despite a fantastic year, Mister Market has been anticipating a slowdown in truck sales pretty much all year, keeping shareholders from benefiting from an excellent year of sales and operations.
A company like PACCAR really proves its chops when sales are down. Most companies can make money when things are good. The great companies show their stuff when things aren't perfect. If the early forecasts pan out, and truck sales fall measurably in North America, PACCAR's management will have a chance to prove their worth.
Overall, the business improvements and efficiency gains -- you can see their impact on profits and margins -- during the past few years more than likely indicate that PACCAR is well positioned for a minor slowing of truck sales.