Moody's Downgrades Paccar

Moody's Investors Service has downgraded its outlook on Paccar Inc. (PCAR) and its main financing arm to Negative from Stable, expecting the heavy truck maker to continue to face difficulties due to a slump in truck demand.

The credit ratings agency has also affirmed its A1 long-term and Prime-1 short-term ratings for Paccar and the financing arm. A1 is an investment-grade rating four notches below the top triple-A rating. Obligations rated A by Moody’s are considered upper-medium grade and are subject to low credit risk.

Moody’s provides Prime-1 rating to taxable securities with maturity not exceeding thirteen months. Short-term ratings are based on the securities ability to honor short-term financial obligations.

In the second quarter of 2009, Paccar had lost a penny per share, excluding a one-time tax gain. Net revenues slipped 55% driven by a significant fall in volumes on the back of a weak economy. Truck sales declined 37% in the U.S. and Canada and dropped 67% in Europe, where Paccar makes trucks and engines under the DAF brand. For the company's financial-services unit, profit dropped 73% from a year ago and revenue fell 26%.

Paccar expects truck sales to remain weak in Europe. The company has cut its 2009 estimate for European sales of trucks heavier than 15 metric tons to a range of 150,000 to 180,000 from the previous expected range of 180,000 to 220,000. Given the weak economy, we are apprehensive about Paccar achieving the target.

Moody's expects the economic downturn to continue to hurt asset quality and returns of Paccar's global financial services operations. It expects Paccar's credit metrics to be very weak this year. However, the agency anticipates truck demand to improve slightly beginning 2010, which should be a respite for truck manufactures.

Based in Bellevue, Washington, Paccar is the third largest manufacturer of Class 6-8 heavy-duty trucks (with a capacity of more than 15 metric tons) in the world after Volvo and Daimler AG (DAI). We maintain our Neutral recommendation on the stock.

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