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Morningstar | Paccar Delivers Record Number of Trucks in the 3Q Raising our FVE to $73. See Updated Analyst Note from 25 Oct 2018

Despite supplier constraints and a nationwide driver shortage, Paccar delivered a record number of trucks in the third quarter. Global deliveries reached 47,800, surpassing the previous record of 46,400 in the second quarter of 2018. Truck and parts gross margin was 14.1% during the quarter, and management expects this to increase to 14.5% in the fourth quarter as it expects supplier constraints to moderate near term. We increased our fair value estimate to $73 from $71 due to our expectation of slightly improved margins in the latter part of 2018 and a lower anticipated long-run tax rate.

Paccar’s truck segment continued to produce strong results, growing revenue 15% year over year. Robust sales in North America were partially offset by fewer build days in Europe during the summer months. The company's European market share in the above 16-tonne class increased to 16.6% year to date, up from 15.1% in the same period last year. Management identifies a goal of reaching 20% market share in Europe. Management was also enthusiastic about the overall truck market in North America, suggesting it might increase slightly in 2019.

Paccar’s parts business continued to show exceptional performance, yielding 14% year-over-year growth. Management was ebullient regarding parts, and expects it to grow 5% to 8% next year, consistent with the increased number of Paccar trucks in operation. To meet the growing demand, the firm recently opened a new 160,000 square foot parts facility in Toronto.

Paccar continues to invest in product innovation, including creating new hybrid and electric powertrains. Yet, during the call, management stressed it would continue to focus on improving diesel efficiency for the long-haul market. While prudent near term, we think the emphasis on diesel may be challenged long term as several new entrants in truck manufacturing are developing electric drive trains, thus we want to see truck builders develop product in various drive train technologies.

Paccar's backlog is growing more than it has been in recent years with orders extending into the second half of 2019. We agree with management’s positive outlook for 2019. However, we believe markets will cool off through the midcycle and maintain our expectation that normalized operating margins will reach 10% by 2022.