EUR 850.00 For Business Accounts Only

Morningstar | Paccar’s Strong 1Q Doesn’t Alleviate Our Concerns About Technology Disruptions; Reducing FVE to $68. See Updated Analyst Note from 01 May 2019

After taking a fresh look at Paccar and incorporating the results from its first-quarter 2019, we are reducing our fair value estimate to $68 from $73 and are maintaining our narrow-moat rating. Its first-quarter performance was exceptionally strong, even considering the buoyant truck market in North America. First-quarter EPS of $1.81 beat consensus of $1.65 and revenue of $6.1 billion beat Street expectations of $6.0 billion. Market share gains in Europe and Brazil along with strong parts sales boosted profits. Despite these exceptional results and Paccar’s 80-year history of profitability, we are growing increasingly concerned about disruptions electric powertrain adoption will have on Paccar’s profitability in our stage II forecast. We have therefore decreased our stage II EBI growth to 1% from 2% and incorporated elevated research and development expenditures into our model.

Paccar continues to produce exceptional products that align well to customer needs, as evidenced by its overall unit sales of 51,500 in the quarter, representing a 16% year-over-year gain. Its success is not merely a result of a booming truck market but Paccar’s ability to increase market share. In the first quarter, European market share increased to 17.1% compared with 16.6% for full-year 2018. In Brazil, where it only began making trucks in 2013, it commanded a 6.7% share of the market. While heavy-duty truck volumes are likely to decline in 2020, Paccar is positioning itself to capture greater aftermarket sales due to aging of its in-service North American engines, which began production nine years ago. Parts sales in the first quarter were a record $1.0 billion, up 7%, and are likely to increase as percentage of overall revenue. Against the backdrop of this stellar performance, management appears firmly committed to diesel technology and has suggested that it won’t need to substantially increase research and development spending, leading us to re-evaluate its long-term prospects.

We estimate that many of the limitations of current-generation batteries will be resolved in the next decade, enabling electric powertrain technology to pose a serious threat to makers of internal combustion heavy-duty trucks around 2030. In recent months, Paccar has made several announcements regarding its own progress toward developing battery-electric and hydrogen fuel cell vehicles. We believe that even if the company is successful in its electrification efforts, the prevalence of electric powertrains in the heavy-duty truck market would penalize the business in four primary ways. First, the content of the new vehicles would change dramatically with a large portion of the vehicle cost attributed to batteries that Paccar is likely to purchase from a third-party vendor. This would be especially painful for Paccar as it made a significant investment developing its own diesel engines. Second, new entrants such as Tesla, Nikola, and Xos will gain market share. Third, high margin parts revenue will be diminished. Finally, the lower maintenance requirements of electric powertrains will severely weaken its independent dealer network, as certain types of repairs (engine overhauls, turbochargers, clutch assemblies) and routine service (oil changes, diesel exhaust fluid refills) will be eliminated.

Somewhat counterintuitively, customer demands for reduced fuel expenditures and emissions could benefit Paccar in the next decade. Enhancements to Paccar’s diesel offerings will serve to boost margins as carriers elect to invest in supplemental fuel-savings technologies, such as waste heat recovery, that are likely to increase the sophistication and number of available options on its future vehicles. Driver-assist functions and partial autonomous functions are also likely to gain adoption during this time frame, boosting Paccar’s ability to capture more of the total cost of truck ownership where upfront vehicle price currently accounts for approximately 10% of this figure.