Why You Should Buy This Stock on Every Dip

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After stumping the Street consistently, PACCAR (NASDAQ: PCAR) couldn’t keep up with estimates on the top line in its third quarter, but hit it right on the bottom line. Now even that’s worth applauding when many are finding it hard to meet already low expectations! Sadly, things are anything but upbeat for its industry right now. So will PACCAR buckle under pressure? I don’t think so, as the company has some things going for it that should help it override any challenges.

Who expected anything better?

Despite sluggish truck tonnage and freight volumes, PACCAR’s truck deliveries rose 12% from the year-ago quarter. The sequential picture isn’t as bright though – deliveries fell 17%, which is yet more proof of the continuing weakness in the trucking industry. Unfortunately, the deceleration has been faster than expected.

If PACCAR doesn’t do too well, Cummins (NYSE: CMI) feels the pinch too, as the former is its largest and oldest customer. Demand from North America, which accounts for more than half of Cummins’ sales in its largest division (engines), slumped in its third-quarter. Engine shipments to the market fell 26% from the same quarter a year ago, pulling its top line down by 11%. But what caught the company off-guard was the way sales from North America grew an insignificant 2% year-over-year, compared to 43% and 12%, respectively, during the first and second quarters. Eaton (NYSE: ETN), one of the leading transmission suppliers to the truck industry and which also has a partnership with PACCAR, had a similar story to tell. Its truck segment was one of the worst performers in its third quarter, with 23% year-over-year and a 12% sequential dip in sales. It expects flattish growth for the division for the full year.

Going by industry reports, a turnaround could take time. What’s going to keep PACCAR on its feet then? I can think of two things-- replacement demand and new launches.

Old-age helps!

Even as customers postpone fresh buying in times of crisis, the need to replace an aging fleet will always be there, irrespective of the industry or sector. Construction-equipment maker Terex’s (NYSE: TEX) third-quarter top line growth would have been negative if not for replacement demand. Sales in its largest division, aerial work platforms, rose 17%, backed largely by such demand, which offset weaker sales in other divisions to finally settle the company’s total revenue growth at 1%.  Terex is counting on old equipment for revenue, and so is Eaton.

Naturally, PACCAR’s bet on replacement demand isn’t wrong, as it could actually boost revenue when industry conditions otherwise remain soft. It also translates into higher aftermarket sales for PACCAR, which is visibly proving to be a good support. If gross margins for its trucks division were 7% in this past quarter, they were amazingly better at 34% for its parts division.  

Hopes from the new

It has been a significant year so far for PACCAR as far as new launches are concerned – it launched more products than ever. The spotlight was grabbed by two "next generation" truck models unveiled under brands Kenworth (Model T680) and Peterbilt (Model 579). As soon as they were first displayed at an Expo in March, PACCAR bagged orders in thousands. The trucks are in production stages right now.

The launches are important for two reasons -- nearly four years and $400 million went into the two models, and they belong to the heavy-duty Class 8 truck segment that is a critical revenue-generating segment for PACCAR. The good news is that the company’s share of the pie is only getting bigger here.

Class act

Despite all the headwinds, share of these two brands in the U.S. and Canada Class 8 markets hit a record of 29% during the first nine months of the year. That’s a percentage point improvement from last year. Note that it reached 30% during the first half of the year. In a previous article, I had detailed how PACCAR has outperformed closest rival Navistar International in Class 8 sales in recent months. That Navistar is still nursing its wounds from a big blow that cost it billions of dollars and God-knows how many customers only makes PACCAR’s prospects appear brighter.

Full-on gas

I also expect PACCAR’s new trucks to be a success because they’ll be powered by the new advanced Cummins-Westport ISX12 G natural-gas engines. Now PACCAR already has a sweet spot in the natural gas truck industry – nearly 40% of heavy-duty trucks run on gas today belong to Kenworth and Peterbilt brands.

So its new trucks should certainly find takers in times when natural gas conversion is heating up. Westport Innovations (NASDAQ: WPRT), which has a key role to play in shaping PACCAR’s way up the gas industry, probably evidences this best. Its venture with Cummins continues to be its largest revenue driver. Westport’s innovative technology allows gasoline engines to run on natural gas has been a runway hit, and boasts an enviable list of customers and partners. India’s largest automaker Tata Motors is the latest to opt for its engine technology. Westport’s bottom line is yet to see black, but it doubled revenue and slashed losses by a third in its last quarter, suggesting a possible turnaround soon. That the company expects full-year revenue to be 30% higher from last year clearly suggests that natural gas as an alternative fuel is gathering steam – a trend PACCAR is poised to benefit from.

Delivering all over

PACCAR’s strength in the developing markets is already improving. It delivered 38% more trucks in South America during the first nine months, and construction of its new DAF trucks (a brand hugely successful in Europe) facility in Brazil is in full swing. DAF has already launched its Euro 6 model that will run on PACCAR’s new 13-liter engine. If PACCAR’s statistics that 13-liter engines dominate nearly 50% of the total North American truck market today are indeed true, then the company clearly is on the right track.   

The Foolish bottom line

PACCAR could turn out to be one of the best bets on a reviving trucking market, so any dip in share prices should be seen as a buying opportunity. In addition, you have its consistent dividends to rely on – PACCAR has never missed a dividend since 1941, and it currently yields a decent 1.8%. I strongly urge you to add PACCAR to your personalized stock watchlist to stay updated on all its news and analysis. Click here to add it.

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Nehams has no positions in the stocks mentioned above. The Motley Fool owns shares of Cummins, PACCAR Inc, and 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.

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