EUR 850.00 For Business Accounts Only

Morningstar | Parts and Services Boost Rush's Results While Heavy Duty Truck Sales Slip

We are maintaining our $46 fair value estimate after no-moat Rush Enterprises released second-quarter earnings. Our long-term thesis remains intact, and we believe parts and services growth will fund management's quarterly dividend of $0.12. Globally, parts and services picked up 15% growth over the prior-year second quarter, and gross profit margins expanded 60 basis points, despite international weakness. Parts and services benefited from increased commercial vehicle activity and Rush earned 21%, 50%, and 35% revenue growth in new medium-duty vehicle sales, new light-duty vehicle sales, and used vehicle sales, respectively.

Rush logged gross profit margin expansions in new and used vehicles (combined) and lease and rental, while parts and services gross margins slipped 42 basis points. Management attributed gross profit margin declines to the jump in hiring during the quarter. For 2018, we forecast operating margin expansion of 10 basis points, and we anticipate operating margins will rise above 4% in midcycle, from 3% in 2017.

Supply chain bottlenecks curtailed new heavy-duty truck sales for the quarter, and management now expects some Class 8 deliveries to roll into 2019. While our forecast assumes new-heavy duty truck sales will pick up during the second half of the year, we've lowered new heavy-duty truck unit sales assumptions to account for manufacturing constraints in 2018. We lowered year-over-unit growth from 12% to 9%, because of slowing new Class 8 truck sales. Subsequently, we raised used truck sales expectations, assuming customers seeking new trucks will turn to the used truck market. Together, our changes resulted in an immaterial change to our fair value estimate of $46.