Ride the Upturn with this Truck Maker
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This company never misses a chance to impress the Street! For the fifth straight quarter, PACCAR (NASDAQ: PCAR) has reported a solid jump in revenue and profits. But despite excellent second-quarter numbers, its outlook for the full year remains subdued. Yet, I am not worried. For I had earlier told you how irrespective of its results, PACCAR deserves to be on your radar. I re-iterate my view. Here’s why…
As I had expected, PACCAR’s truck deliveries were sequentially down, but were 10% higher from the year-ago period as truck tonnage and freight rates maintained decent levels. But the going looks tougher as the year progresses. Though PACCAR didn’t provide a forecast range for its expected full-year earnings, the undertone was a muted one when it mentioned how truck orders will "dampen" for the rest of the year. This wasn’t unexpected, given that peer Cummins (NYSE: CMI) very recently slashed its own sales forecast because of market slowdown.
After rising for months, truck tonnage declined sequentially in the past two months, and freight volumes remained flat. More importantly, heavy-duty truck sales have given up the rapid pace at which they were being sold in recent months—a major cause of worry for companies like Cummins and PACCAR.
But that doesn’t mean truck sales will fall off the cliff anytime soon. The retail truck sales market continues to be active thanks to low fuel prices. Tonnage and freight rates are pretty firm at the moment, and aging fleets continue to be an issue, buoying replacement demand. PACCAR’s customers, for instance, might be withholding fleet expansions right now, but are not shying away from replacing their aging fleets.
Old over new
Replacement demand in fact makes for an intriguing story. As I am writing this, stories of bellwether Caterpillar (NYSE: CAT) plodding over Street estimates and raising full-year outlook are pouring in. Before you get confused, replacement demand was one of the key factors behind Cat’s stellar numbers. The company had earlier predicted how such demand should boost revenue even from the European region. Equipment maker Terex, which is just waiting around the corner with its second-quarter numbers, too recently hired nearly 500 employees at its U.S. plants just to meet growing replacement demand.
For PACCAR, rising average age of vehicles translates into a two-fold advantage -- higher truck as well as aftermarket sales. The most optimistic outlook comes from the American Trucking Association, which expects the trucking industry to head for golden days in the years to come.
If the U.S. growth story isn’t exciting enough, PACCAR is also gearing up to take advantage of the high-potential emerging markets. Construction at its new heavy-duty DAF trucks facility in Brazil is well on track, and trucks should roll out by next year. The timing seems right as the nation prepares to host the 2014 World Cup and 2016 Summer Olympics. Both Terex and Cat are investing in this market as well.
Filling up On Gas
But none of these excite me as much as PACCAR’s growing strength in the natural-gas truck market does. It now boasts of an enviable 40% share of the heavy-duty natural-gas powered truck market in the U.S., thanks largely to its strong relationship with the leaders in the natural-gas engine market—Cummins and Westport Innovations (NASDAQ: WPRT).
As Cummins’ oldest and largest customer, PACCAR is always at the forefront to adopt their engines. The two new "next-generation" truck models it launched under brands Kenworth and Peterbilt recently are also going to be powered by the new Cummins-Westport heavy-duty ISX 12G engines (which will go under full production next year). These trucks, production of which will go into full swing in the forthcoming quarters, should prove to be great additions to PACCAR’s portfolio as they belong to the heavy-duty Class 8 truck segment. This segment is a big revenue driver for the company, and is thankfully gaining market share swiftly.
Stepping on the accelerator
After hitting a record high of 28.1% last year, market share of both brands in the American and Canadian Class 8 market moved up to 29.9% during the first six months of this year. Particularly worth noting is the fact that the pace at which PACCAR’s Class 8 segment sales is rising is much faster than peer Navistar International’s (NYSE: NAV), which currently enjoys a larger market than PACCAR. Strong brand name, and the fact that customer’s faith in Navistar’s products is dwindling because of warranty, repairs and certification issues is boding well for PACCAR.
Navistar’s pains and the rising popularity of the gas as an alternative fuel suggests PACCAR could be a big beneficiary in the near future.
I think PACCAR’s a great growth story to own, and looks worth betting on before a reviving truck market takes it too far down the road. I am definitely going to keep a close watch on this stock, and urge you to do the same by adding it to your personalized stock watchlist. Click here to add it.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services recommend Cummins, PACCAR Inc, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.