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Morningstar | Paccar Delivers Record Number of Trucks in 4Q; Maintaining our $73 FVE. See Updated Analyst Note from 30 Jan 2019

Despite ongoing supplier constraints, narrow-moat Paccar delivered a record 50,400 trucks during the fourth quarter, representing a 13.8% increase in volume from the fourth quarter in 2017. The company handily beat consensus quarterly GAAP EPS by $0.13 or approximately 8%. Backlog is at a record level and the company has already taken some orders for 2020. Paccar also expects the overall market for Class 8 trucks in U.S. and Canada to expand further in 2019, to a range of 285,000 to 315,000 units from 285,000 units in 2018. Taking these factors into account, we maintain our 9.0% midcycle operating margin assumption and our fair value estimate of $73.

Paccar’s truck and parts segment continued to produce exceptional results in the fourth quarter with revenue growing nearly 16% year over year. At the same time, truck and parts gross margin increased to 14.2% from 13.9% from the fourth quarter in the previous year. In addition to robust sales in North America, it was a particularly strong quarter for Paccar’s sales in Europe. Its DAF brand achieved 16.6% market share in the region for the above 16-tonne category, compared with 15.3% in the same period last year. The company projects above 16-tonne registrations in the region to be in the range of 290,000 to 320,000 trucks in 2019 compared with 319,000 in 2018.

Paccar’s parts business demonstrated exceptional performance during the quarter, yielding 11% year-over-year growth. We think recent investments in its parts distribution capability and customer-focused technology has created a favorable environment for Paccar parts. In 2019, the company expects parts revenue growth of 5% to 8%. Given the expected increase in parts demand, the company announced plans of further investments in its parts distribution systems this year.

While announcing several alternative powertrain developments in recent months, management reiterated its belief that diesel technology will dominate the long-haul market for the foreseeable future. Currently, Paccar has electric and hybrid trucks in field trials where they are employed in local and regional applications. It also announced that the company has hired software engineers to develop its own Level 4 autonomous technology. With such initiatives growing in scope, the company plans to increase R&D expenses in 2019 to a range of $320 million to $350 million, up from $306 million in 2018. While we applaud management’s continued efforts to embrace new technology, we note that Tesla and Nikola continue to announce pre-orders for their alternative drivetrain long-haul trucks. Given these developments, we continue to be cautious when modeling the long-term performance of Paccar as it will likely need to increase investments in product development to mitigate market share loss.