Tap Trucking Growth in North America With PACCAR

PACCAR (PCAR) has struggled on the stock market so far this year. This looks surprising, as the company has performed consistently well over the past few quarters, and has beaten Wall Street's earnings estimates in each quarter over the past year. In fact, the company's stock price performance has not been as impressive as its revenue and margin growth.

But, given the improvement in the North American truck market due to improving construction and industrial demand, it is likely that PACCAR's performance will continue improving.

I'm saying this because PACCAR has a strong line-up of brands such as Kenworth, Peterbilt, and DFA.

An extensive dealer network and product portfolio is driving PACCAR

More importantly, PACCAR has an extensive dealer network with nearly 2,000 locations in more than 100 countries, although half of the company's profit comes from sales within the U.S. As such, PACCAR has a stronger dealer network as compared to the likes of Volvo, which has only 650 outlets globally.

Now, PACCAR has made good use of its strong product portfolio and dealership network. This is clearly reflected in its last-reported results, as PACCAR's revenue from the truck segment increased 15% year over year to $3.98 billion.

What's driving growth?

Last quarter, truck sales for PACCAR in the U.S. & Canada increased 26.4%. Thus, PACCAR is making good use of the opportunity present in the truck market in the U.S. and Canada, and it should continue benefiting in the long run as sales of trucks in both these markets are anticipated to grow this year.

The key reason behind the growth in the North American truck market this year can be attributed to improving construction demand and higher industrial activity. For instance, sales of new homes in the U.S. shot up to seven-year highs in May, but there is not enough supply in the market to satisfy the rising demand.

As a result, building permits in the U.S. are rising, with the number close to an 8-year high in May. As a result, there is a strong probability that more homes will be built in the U.S. going forward, and this will lead to more demand for PACCAR's trucks, as trucks are used to transport construction material. Additionally, due to a drop in oil prices in the past year, demand for transporation by trucks can improve as railroads will lose some of the cost advantage.

PACCAR's moves to tap growing demand

PACCR has strong fundamentals with positive cash flow and a strong balance sheet. This has enabled the company to invest over $3.1 billion in new products and services in the last five years. As a result, it is not surprising to see that the company has come up with models such as the Kenworth T880 truck, which was awarded the 2015 Commercial Truck of the Year by the American Truck Dealers.

Additionally, PACCAR has expanded its manufacturing capacity by over 15% in the last five years. For 2015, the company has planned capital expenditures of $325 million-$375 million in order to enhance powertrain development and improve operations at its assembling plants and distribution facilities. PACCAR is also going to spend a sum of $225 million to $ 250 million to develop industry leading trucks and services under its three nameplates.

Moreover, PACCAR is expanding its truck parts distribution center in Renton to a size twice that of the existing one. The centre is expected to be complete by the middle of this year. This expansion comes as a response to the increased level of parts distribution activities in Northwestern U.S. and Western Canada. In the light of increased potential opportunities and improving industrial outlook, PACCAR's expansion plans look apt for contributing to the company's long-term growth.


PACCAR is riding on the success of its own efforts. It has made some smart and timely investments that are allowing the company to improve its performance. Additionally, PACCAR is able to charge a premium of as much as 10% as compared to competing products due to its award-winning products. Thus, in my opinion, PACCAR should be able to improve its financial performance going forward, and investors should consider capitalizing on the stock's recent drop to buy more shares.

Published on Aug 24, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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