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Morningstar | PCAR Achieves 2Q Revenue Beat While Orders Extend Into 2020; Increasing FVE to $70

The strong North American economy and a protracted replacement cycle once again drove higher truck volumes, which allowed Paccar to sell 53,300 trucks during the quarter, representing a 13% increase year over year. Its manufacturing revenue during the period was $6.27 billion, which exceeded consensus estimates of $6.19 billion. Due to disproportionately more sales occurring in higher tax rate North American jurisdictions, EPS missed consensus of $1.82 by $0.04. In addition to raising its 2019 guidance for industrywide class 8 sales by 10,000 to 310,000, management also indicated order intake for next year was larger than it typically experiences by midyear. Therefore, we now forecast that Paccar’s 2020 revenue only declines 10.4% compared with our previous estimate of a 13.5% decline. Due to the time value of money and our more favorable view of 2020, we are increasing our fair value estimate to $70 from $68.

Paccar fired on all cylinders in the second quarter as truck sales increased to $5.3 billion, up 16.7% year over year. This growth was principally a result of the strong class 8 truck market in North America that was partially offset by lower build rates in Europe. There is also some evidence that Paccar’s market share may be trending upwards as its share of North American class 8 backlog was 36% compared with its actual market share of approximately 30% in recent years. This is consistent with our research that suggests Paccar’s premium trucks are used to recruit drivers during periods of low unemployment.

Paccar’s parts sales were a record $1.0 billion in the quarter, up 6% year over year. This follows Paccar’s class 8 market share growth that has increased from about 25% a decade ago. Additionally, Paccar has steadily sold more of its MX engines each year since they were introduced to the North American market in 2010. In order to address recent increases in demand for these engines, Paccar is adding capacity to its Columbus, Mississippi engine plant.

During the second-quarter earnings call, management outlined several initiatives to expand its technical capabilities and improve aftermarket support. On the technology front, it announced two new software development centers in Kirkland, Washington and Eindhoven, The Netherlands. These facilities will be used to advance Paccar’s connected solutions and accelerate development of embedded vehicle software. Management also indicated that it was expanding its parts distribution business by adding warehouses in Las Vegas, Nevada and Ponta Grossa, Brazil.

We applaud Paccar’s recent efforts to broaden the scope of its operations and improve its technical capabilities. These will be required to increase the attractiveness of its diesel platform, which will be forced to compete against low maintenance electric powertrains in future years. Fortunately for Paccar, there are still many unresolved issues that could delay widespread adoption of electric class 8 trucks, including inadequate battery energy density and a lack of charging infrastructure. Moreover, the two most significant electric commercial truck startups, Nikola and Tesla, have been unwilling to provide crucial product specifications or details on their production milestones. This may signal that the threat posed by electric powertrains is further away than our current 10-13 year estimate.