PACCAR (PCAR 2.61%) is the largest American heavy-truck manufacturer (U.S. market share 27%), and the world's fifth largest. Familiar to Americans from its Kenworth and Peterbilt brands, it's a significant factor in Europe through its DAF subsidiary (14% market share), as well as Mexico (44%), Canada (30%), and Australia (23%). Most of its revenue, however, comes from the U.S. and Canada: 68%. Its European share, where DAF confronts powerful competitors such as Daimler, Volvo, and Volkswagen/MAN, is more valuable than it sounds: European road freight is more important and more fleet-oriented than North American trucking, since European rail is primarily a passenger service, and independent owner-operators are comparatively rare.
Although its shares have been volatile, until recently the market clearly appreciated PACCAR's virtues. But since July 22 it has lost 8.2% percentage points in relative performance.
Data source: Yahoo! Finance.
While this is not extraordinary underperformance for an industrial share in the current environment, it is strangely inappropriate: PACCAR is one of very few industrials that should be performing in line with, if not better than, the S&P 500 Index. Analysts' pessimism about its outlook is misplaced, and seems to be based on drawing analogies with some of PACCAR's competitors that aren't appropriate.
Recent results have been solid
It isn't obvious why PACCAR's share price has suffered lately: The company's Q2 report, released July 28, was better than expected, as was its Q3 report. After a dip in late summer, U.S. truck sales resumed their previous upward trend. All of which led up to full-year results that set a record, with strong demand both in North America and Europe, which accelerated in Q4.
Reports from peer Cummins (CMI 3.53%) seem to have spooked investors. Cummins is a supplier of engines not only to the North American trucking industry, but internationally and to heavy-equipment manufacturers. The slowdown in China has seriously crimped sales in both, but especially the latter category. The continued inability of Navistar to produce income in a strong truck market can't have helped PACCAR, either. MAN and Daimler Benz have reported sharp reductions in Chinese demand, which is quite important to both of them.
However, PACCAR is different. It has little exposure to China (it sells to Taiwan but only purchases components from China) or to extractive industries or heavy construction (the engines it sells to third parties are not for use in off-road applications). So developments that affect Cummins and others in truck manufacturing aren't major issues for PACCAR.
Nor is there any reason for investors to transfer concerns about peak passenger-car sales to the heavy-truck market. Many commentators feel that unit car and light truck sales won't increase beyond 2015 levels (although changing mix will continue to favor manufacturers) for a variety of reasons relating to used markets and financing. But heavy trucks are a very different business from cars, shaped by unrelated dynamics. PACCAR expects worldwide demand to increase 2% annually through 2019, with North America growing 1% and Europe 5%. This is a conservative outlook compared with forecasts from Deloitte and other sources.
PACCAR is doing fine
While last summer's dip in sales indicates that sales growth won't be entirely smooth, there are solid reasons for optimism about PACCAR. The fairly steady growth in heavy-truck sales over the past five years has largely made up for an earlier dearth of investment: Major acceleration in sales is not to be expected, but the increase we've seen recently represents the realization of postponed investments rather than overinvestment. PACCAR's conservative estimate will be achieved if sales continue at their normalized rate.
Not least of the reasons to expect this are extraordinary levels of utilization. Trucks may be tough, but the more ton-miles driven, the more rapidly they must be replaced. Low fuel prices have encouraged utilization and have delayed any threat from intermodal transportation (which is probably exaggerated, in any case: Intermodal is certainly growing, but it's only fair to point out that it has been touted as the "next big thing" for 30 years).). High utilization and low fuel costs mean that times are comparatively good for owner-operators, and they should be in a financial position to replace their rigs if necessary.
Heavy-truck businesses that aren't reliant on weak markets, such as Latin America, or oversaturated and weakening markets, such as China, are in an attractive position relative to others in the industry, or to capital goods producers generally. Granted, PACCAR sells in Latin America and will be affected by weakness in Brazil. But surely this isn't enough to account for the 11% decline in Yahoo! Finance's consensus estimate for 2016: Analysts must be expecting U.S. sales to deteriorate. I have yet to encounter strong arguments in support of this opinion. While Volvo's Mack Truck unit seems to have seen weak orders in Q4, PACCAR had precisely the opposite experience and forecasts continued growth in 2016.
If PACCAR's earnings are merely flat in 2016, it's trading at 12.3 times Yahoo! Finance's consensus estimate, a rather attractive price for such a solidly financed asset. This is a case where investors may well benefit from betting against the consensus.
