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Morningstar | Rush Outperforms as Strong Sales of Heavy-Duty Trucks Continue Into 2019

No-moat Rush Enterprises announced another quarter of exceptional earnings with adjusted EPS of $0.98 beating consensus estimates of $0.82 in the first quarter. Revenue of $1.35 billion missed consensus of $1.40 billion but was up 8.7% year over year. Most notable was the increase in parts and service revenue, which was up 9.5% year over year, suggesting that various technology initiatives are finally yielding positive results despite previous difficulties with enterprise resource planning software. The favorable results across all of Rush’s operations suggest the buoyant heavy-truck market may have a few quarters remaining. But after taking a closer look at the potential impacts of the coming decline in truck volume likely in 2020, we plan to reduce our fair value estimate to $47 per share from $48.

Strong performance across segments help lift the operating margin to 4.2% in the quarter, up from 2.6% in the first quarter of 2018. Contributing to this performance were the expansion of Rush’s service offerings, hiring of additional technicians, and expanding hours of operation. Rush also continued enhancements to its all-makes parts catalog, which offers products outside the core brands it traditionally sold and serviced. We think the quarter's performance was especially impressive given various headwinds beyond management’s control, including wage inflation and weakness in the oil and gas sector. However, recent pipeline developments may boost sales from customers in the energy sector and help Rush manage through the coming downturn in Class 8 truck sales. Additionally, its medium-duty truck backlog is the highest it's ever been. Overall, we remain optimistic about management’s positioning of the company to weather what may be a 20%-plus decline in Class 8 unit volume in 2020. At the same time, there is growing enthusiasm for alternative powertrain heavy trucks, whose adoption could affect the long-term value proposition of Rush’s service-rich business model.

While not material to Rush’s near-term performance, we note that in the first quarter there was significant press activity related to three new entrants to the heavy-duty truck market, Tesla, Nikola, and Xos (formerly Thor Trucks), that employ electric powertrains. Several incumbents, including Rush supplier Paccar (Peterbilt, Kenworth) also recently announced pre-production models of battery and hydrogen fuel cell electric trucks. While it may take over a decade for electric powertrains to gain significant penetration into the class-8 market, a major shift away from internal combustion engines will ultimately be detrimental to the economics of Rush’s business. In recent quarters, parts and service contributed approximately 63% to Rush’s overall gross profit. Electric vehicles don’t require routine maintenance such as oil changes or costly repairs to turbochargers, clutch assemblies, or exhaust treatment systems. The reduction in high margin service volumes will be compounded by fewer interactions trucks owners will have with their services providers that use these opportunities to upsell other products and services.

Tempering our concerns about the disruption of electric powertrains to Rush’s business is the absence of critical vehicle specifications such as weight or battery capacity revealed by the new entrant manufacturers. Moreover, there appears to be a disconnect between the growing volume of announcements related to electric heavy-duty truck development and customer testimonials verifying the performance of vehicles, prototype or otherwise. Adding to the uncertainty is the cavalier way the new entrants appear to be allowing their launch dates slip. Most notable is Tesla’s recent suggestion that production of its new semi will occur in 2020 instead of 2019. Given all these developments, we will be watching very carefully for concrete evidence of electric heavy-duty electric vehicle production facilities breaking ground. Meanwhile, our larger body of research suggests that a serious threat to traditional truck manufacturers and dealers will likely occur after 2030.