Paccar Scales Back on Ambitious Project

Headquartered in Bellevue, Washington, Paccar Inc. (PCAR - Analyst Report) announced the delay in the commissioning of its diesel engine plant near Columbus, Mississippi. Paccar attributed the delay to adverse economic conditions that have impacted truck demand. The plant, which was scheduled to begin operations by the end of 2009, will now start production in late 2010.

Paccar is engaged in the design, manufacture and distribution of light, medium, and heavy-duty trucks. The company markets heavy-duty diesel trucks under the Kenworth, Peterbilt and DAF brands. The company’s trucks are used for over the road and off the highway to haul freight, petroleum, wood products, construction and other materials. Paccar’s upcoming plant in Mississippi will manufacture 12.9-liter and 9.2-liter diesel engines for Kenworth, Peterbilt and DAF vehicles.

Back in 2007, Paccar had signed a contract with the state to provide 500 jobs at the Mississippi plant by 2013. According to the management, construction at the facility is nearly completed and workers are installing and checking equipment. This is a matter of concern, as the company has incurred capital expenditure for the plant but has decided to keep the plant idle, as the economic outlook is bleak.

A downturn in the U.S. has affected Paccar’s freight shipments and truck purchases worldwide. Paccar expects European sales to decline by as much as 10% in 2009. Truck retail sales have dampened due to the increase in diesel prices along with the depressed housing market and lower auto production. Global truck retail sales in 2008 were below the five-year average of 235,000 units because of the current recession.

The weak truck markets will continue to affect PACCAR’s business in North America and Europe in 2009. The company has lowered its 2009 outlook in the U.S. and Canada. PACCAR is now looking at truck sales in the range of 100,000 to 130,000 units for the industry in 2009, down from the previous estimate of 130,000 to 170,000 units. Furthermore, PACCAR faces strong competition from its three principal competitors Navistar International (NAV - Analyst Report) (headquartered in the U.S.), and Daimler Ag (DAI) and Volvo (both headquartered in Europe) in the U.S. and Canada truck market.

We rate the stock a Hold and set a six-month target of $30.00.

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