PACCAR; A ‘Truckload’ of Value?

PACCAR (NYSE: PCAR) is one of the largest manufacturers of premium light, medium, and heavy duty vehicles in the world. However, the Company thinks of itself as a technology business involved in truck manufacturing…truck or technology, I believe PACCAR offers good long-term value for investors. Lets take a look at the Company’s last five years shall  we?

As can be seen from the trend analysis presented, several PACCAR KPIs have performed very well over the past five years:

PCARAnalysis.au 11182015

Each of the Company’s reporting segments delivered strong growth YoY, with its main Truck business growing revenues by an average 23% annually.  Dissecting top-line growth in the Truck segment shows volume gains were the main contributor in four of the six years reviewed. PACCAR’s premium positioning also afforded it pricing power in each year under review, and Management’s continued focus on efficiency and cost-saving initiatives allowed it to keep more of these price increases by way of rising gross margins. Good job PACCAR!

Gross margin in the Parts operation has been on a downward trend but are still strong in absolute terms.

Revenues from the firm’s Financial Services business is growing at a slow and steady pace, with its Finance Margin climbing nicely and declining loan loss provisions. Prospects of higher interest rates in the near term will likely see pressure on margins and a climb in provisions…but nothing that should cause significant deterioration in this segment in my opinion. Rising debt levels in Financial Services is needed to support this important operating segment and should be viewed in context (debt from the manufacturing side is nil).

Other positive trends include:

  • Rising cash-flow from operations.
  • Declining interest expense / payments.
  • Rising coverage ratios.
  • High quality EPS growth with virtually zero boost from buybacks.
  • Rising quarterly dividends (dividends paid every year since 1941) and frequent special dividends. Current payout ratio of 22.5% leaves room for further increases down the road.

In addition to the aforementioned quantitative factors, PACCAR also possesses the following valuable qualitative factors:

  • Excellent brand name / recognition.
  • Strong management; continuous focus on efficiency and meaningful R&D spend.
  • Premium product positioning.
  • Fully integrated business:  manufactures trucks, truck parts, and leases and rents trucks, allowing it to capture value along every step of the way from factory to customer.
  • Good long-term prospects with fairly decent barriers to entry.
  • Products used in a variety of end-industries.
  • Solid business model.

PACCAR is currently trading at a TTM PE of 11x and a dividend yield of about 2%. While a rate rise in December may see some weakness in the shares take hold if entered into now, I believe the above makes a good argument for a long-term investment in this truck, oops, technology company.

What do you think of PACCAR?

 

 

 

 

 

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