Paccar: Leading Cleaner Truck Market; Slowing Truck Order Short-Term Risk (NASDAQ:PCAR)

PACCAR Inc. (NASDAQ:PCAR) is one of the leading company that designs and manufactures premium commercial trucks globally. In fact, it delivered 185,900 vehicles worldwide in FY’22. Management remains positive about this year’s outlook, however, there is some concern about the potential decline in the freight market in the US and slowing Class 8 Truck Orders, which could have a negative impact on PCAR’s profitability in the future. This might not bode well for PCAR in the short term, but it has taken steps to mitigate this risk. For example, the company has been working to improve its high-margin Parts segment with increased production capacity in Louisville and growing investments in research and development focused on its key technology and innovation projects. These initiatives make PCAR well positioned to take advantage of the growth opportunities in the $6 trillion global truck market.

Company Overview

PCAR operates through three segments: Truck, Parts, and Financial Services. Its Truck segment creates and produces light, medium, and heavy-duty trucks under the Kenworth, Peterbilt, and DAF brand names, all of which have garnered awards, as stated below.

The new DAF XG distribution and vocational truck was named the 2023 International Truck of the Year. Kenworth and Peterbilt earn six manufacturing leadership awards from the National Association of Manufacturers. Source: Q4 2022 Earnings Call Transcript

PCAR showcased its three models at CES 2023. One of them is a battery-electric Peterbilt Model 579EV and fuel-cell electric Kenworth T680. This highlights PCAR’s efforts to reduce emissions and improved fuel efficiency, which are important considerations in today’s transportation industry in light of the ongoing concerns about climate change. Additionally, they brought Peterbilt autonomous demonstration truck featuring Aurora’s self-driving technology. Another promising catalyst is its early involvement in this area, which could be a key driver of growth for the company in the future. In fact, Aurora (AUR) already plans to roll out its driverless trucks by 2024. These developments show that PCAR is taking an active role in the shift towards reducing greenhouse gas emissions and improving air quality, and is investing in technologies that align with these goals. PCAR also enjoys environmental leadership awards, as quoted below.

The reporting firm CDP again recognized PACCAR as an environmental leader with an elite A rating. This rating places PACCAR in the top 1.5% of over 18,000 reporting companies. And PACCAR was recognized as a top place for Women to Work by the Women and Trucking Organization for the fifth consecutive year. Source: Q4 2022 Earnings Call Transcript

Additionally, despite the slowing class 8 truck order in the January report, management believes that trucking market will remain strong in 2023.

The 2023 US and Canadian Class 8 truck market deliveries are forecast to be in a range of 270,000 to 310,000 vehicles.

In 2023, confidence in the European economy is growing and with pent up demand for new trucks we expect the above 16-ton truck registrations to be in the range of 270,000 to 310,000. Source: Q4 2022 Earnings Call Transcript

On a mid-point basis, this will result in 290,000 vehicles in fiscal year 2023, which is an increase of 2.29% from the 283,500 vehicles recorded in 2022. However, when comparing this year-over-year growth rate to its 13.4% recorded in fiscal year 2022, it appears that the market outlook is slowing down. Additionally, as noted below, according to analyst Jeffrey Kauffman, the likelihood of recession might lead to a slower class 8 truck demand environment.

Trailer production could decline from 287,000 to 267,000 by next year, and Class 8 orders could drop from 280,000 this year to 240,000 next year before improving. Source: Transport Dive

If this prediction holds true, it looks like the trucking industry could face a rough patch in the near future. This is especially true, as many analysts are predicting that the market may be in the peak of its current cycle, as evidenced by the slowing total revenue estimates in FY’24 and FY’25, before we might see improvement in FY’26 and onwards.

Despite this potential total revenue slowdown outlook, PCAR showed some operating efficiency with its expanding net margin of 10.45%, up from its 5-year average of 8.42%. However, upon further investigation, its Financial services segment ended the year with a slower total revenue amounting to $1,505.4 million, down from 1,687.8 million recorded in FY’21, despite today’s strong pricing environment. However, management sees that this will start to moderate in FY’23, hence could contribute to temporary disruption on its margin growth.

Wait For A Pullback

Wabash National Corporation (WNC), Oshkosh Corporation (OSK), Cummins Inc. (CMI), AB Volvo (OTCPK:VLVLY), Caterpillar Inc. (CAT)

When compared to its dividend-paying peers, PCAR trades at a favorable forward P/E ratio of 13.47x, which is lower than the peers’ average. However, due to the previously mentioned temporary weakness, which may result in a slowing margin, its forward EV/EBITDA ratio of 10.79x appears to be unfavorable in contrast to its peers’ average of 9.59x. Furthermore, unlike its peers, only PCAR has an unfavorable forward EV/EBITDA compared to its trailing EV/EBITDA of 9.91x, making the stock unattractive as of this writing. This sentiment is further reinforced by the average target price of $73 set by street analysts, making PCAR risky in today’s level.

Potential Price Weakness

When looking at the most recent weekly trading candle, it is evident that there is some price action weakness. This could result in a potential correction and drive PCAR to revisit its $65 support zone. The alignment of its 20-day, 50-day, and 200-day simple moving averages suggests a bullish trend. However, the current price’s distance from the 200-day simple moving average increases the volatility risk of a potential reversion to this average. Hence, in my opinion, PCAR does not offer a favorable risk-reward ratio at this time. If the $65 support does not hold, I anticipate that $63 may act as a strong support to keep an eye on.

To Sum It Up

Despite the temporary weakness, PCAR’s balance sheet remains liquid with its improving debt to equity ratio of 0.98x, better than its 5-year average of 1.08x. Additionally, its outstanding inventory turnover in today’s challenging operating environment compared to its peers, put PCAR in a better position in light of slowing demand environment. Overall, considering its current short-term risk, I believe scaling in slowly and waiting for a better price remains a good strategy especially in today’s bearish market.

Thank you for reading and good luck everyone!