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On Jan 15, 2014, we affirmed our Neutral recommendation on PACCAR Inc. (PCAR - Analyst Report). Though the company enjoys a strong market share and expects boost in sales due to the ongoing replacement of the aging truck population, it faces high competition in the commercial trucks market and suffers from weak industry sales.

Why the Reiteration?

PACCAR posted a 31.8% rise in earnings to 87 cents per share in the third quarter of 2013, from 66 cents in the same quarter of 2012, surpassing the Zacks Consensus Estimate of 85 cents. Net income surged 32% to $309.4 million from $233.6 million in the year-ago quarter.

PACCAR expects Class 8 industry retail sales of 205,000–215,000 vehicles in the U.S. and Canada in 2013. Industry retail sales in the above 16-ton truck market in Europe are expected to be in the range of 215,000–225,000 units in 2013.

PACCAR is well positioned in the key non-U.S. markets through its investments in growth strategies. The company is optimistic about its expansion plans in South America and Russia. The new DAF factory in Ponta Grossa, Brazil and the establishment of a subsidiary named DAF Trucks in Russia are expected to boost earnings.

However, PACCAR posted lower earnings in the first nine months of 2013 due to lower revenues generated from its truck sales. Unit sales of trucks declined during the period owing to lower industry retail sales in the U.S., Canada and South America, partially offset by higher industry retail sales in Europe.

Moreover, PACCAR’s commercial truck markets face tough competition. Profits in the Financial Services segment are also exposed to lower margin and truck repossessions.

PACCAR is the third-largest manufacturer of heavy-duty trucks (with a capacity of more than 15 metric tons) in the world after Volvo and Daimler AG (DDAIF). The company also provides customer support for its products by supplying aftermarket parts as well as finance and leasing services. PACCAR has a long-term agreement with Cummins Inc. (CMI - Analyst Report) to provide a continued supply of engines.

Other Stocks to Consider

PACCAR currently carries a Zacks Rank #2 (Hold). Another stock worth considering in the automobile sector is Harley-Davidson, Inc. (HOG - Analyst Report), which carries the same Zacks Rank.

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