Will PACCAR's Focus on Electrification Help Counter Headwinds?

PACCAR Inc. PCAR shares have rallied 12.1% quarter to date, underperforming the industry’s rally of 44.1%. PACCAR currently carries a Zacks Rank #3 (Hold).

The company has been witnessing upward earnings estimate revisions, of late. Over the past 60 days, the Zacks Consensus Estimate for the current quarter witnessed an upward revision of 50%, whereas the same saw a spike of 18.9% for 2020. The trucking giant displays a strong surprise record. Its earnings surpassed the Zacks Consensus Estimate in three of the preceding four quarters and missed in the other, the average surprise being 8.46%.

Let’s delve deeper into the tailwinds and headwinds faced by the company.

Positive Drivers

One of the leading names in the trucking business, PACCAR offers a wide range of trucks with a solid reputation in terms of quality and reliability. This consistency in product quality has enabled PACCAR to gradually increase its market share globally. The company has managed to maintain its profitability throughout the COVID-19 lockdown given its reputation for quality and leading brands namely Kenworth, Peterbilt and DAF.

Continued growth in the aftermarket parts segment is a positive. Aftermarket parts also tend to be less cyclical than the heavy trucks segment and help the company control costs by building its own engines and boosting profitability. Moreover, PACCAR designs MX engines to an industry-leading B10 life of one million miles, which implies that 90% of PACCAR MX-13 and MX-11 engines are expected to reach one million miles without any servicing.

PACCAR’s investment in next-generation technology across its range of industry-leading transport solutions that are environmentally friendly bodes well for the company. The firm is investing for long-term growth in aerodynamic truck models, along with electric and autonomous trucks to keep in pace with the changing dynamics of the industry. At present, the company has 60 electric vehicles and 10 hydrogen fuel cell-powered vehicles in testing. In addition, the Silicon Valley office magnifies PACCAR's reach to advancing technologies across the globe.

Even amid the coronavirus crisis when many firms have been tapping brakes on dividend, PACCAR has maintained its payout, thus preserving shareholder value. Notably, PACCAR has had 81 consecutive years of positive earnings and has not missed a dividend since 1941. The company’s robust balance sheet and steady cash-flow generation boost shareholders’ confidence.

Headwinds Ahead

The coronavirus pandemic-induced global economic slowdown has escalated the credit risk associated with the company's financial services segment. Although PACCAR claims to have disciplined credit underwriting, and stringent portfolio management, the economy might take longer than anticipated to recover. In such a situation there is a possibility of facing defaults on financed and leased trucks.

Approximately 10% of the PACCAR’s worldwide truck production was manufactured in the U.K. In the event of exit of the U.K. from the European Union (EU), it is anticipated that there would be an increase in tariffs from truck components and parts procured from the EU. It is also expected that there would be a hike in tariffs on trucks sold to the EU. If a new deal is not reached during the transition period, the company stands at risk.

Bottom Line

Despite the above-mentioned hurdles, we believe the company’s competitive advantage of efficiency, excellent track record of profitability supported by strong metrics, healthy cash-flow generation, along with continued investment in latest technology, will enable PACCAR to sail through the turbulent times.

Key Picks

A few better-ranked stocks in the same industry include General Motors GM, Polaris Inc PII and Ford Motor F. General Motors and Polaris currently flaunt a Zacks Rank #1 (Strong Buy), while Ford carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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