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PACCAR Inc. (PCAR - Analyst Report) reported a 14.3% fall in earnings per share to 66 cents in the third quarter of 2012 from 77 cents in the same quarter of prior year. However, earnings were in line with the Zacks Consensus Estimate during the quarter. Total profit declined 17.0% to $233.6 million from $281.6 million in the third quarter of 2011.

Revenues in the quarter dipped 10.3% to $3.8 billion; however, it was higher than the Zacks Consensus Estimate of $3.7 billion. The decline in earnings and revenues was attributable to lower industry truck orders in North America and Europe due to the unfavorable conditions in the global economy.

Segment Performance

Revenues in the Truck and Other segment slipped 11.2% to $3.6 billion in the quarter. Pre-tax profit in the segment ebbed 20.1% to $257.2 million versus $321.9 million in the third quarter of 2011.

PACCAR believes its DAF branded trucks in Europe will excel further driven by new product launches such as DAF XF. For 2012, industry registrations in the above 16-tonne truck market in Europe is estimated to be 215,000-225,000 units. Further, truck registrations in 2013 is expected to be in the range of 210,000–250,000 units due to the purchase of Euro 5 vehicles ahead of the introduction of the Euro 6 emission requirement in 2014.

In the first nine months of 2012, PACCAR occupied a share of 29% in the Class 8 retail market in the U.S. and Canada as customers benefited from Kenworth and Peterbilt vehicles’ low operating cost. The company expects Class 8 industry retail sales in the U.S. and Canada in the range of 210,000–220,000 vehicles for 2012 and 210,000-240,000 units for 2013, driven by ongoing replacement of the aging fleet.

PACCAR is also optimistic about its expansions in South America and Russia. The company’s ongoing construction of a new DAF factory in Ponta Grossa, Brasil and establishment of a subsidiary, DAF Trucks, in Russia are expected to boost earnings.

Revenues from PACCAR Financial Services (PFS) segment rose 3.6% to $273.5 million while pretax profit increased 30.1% to $80.4 million from $61.8 million in the third quarter of 2011. PFS has a portfolio of over 149,000 trucks and trailers while PacLease – a major full-service truck leasing company in North America and Europe – has a fleet of over 32,000 vehicles.

Share Repurchase

During the quarter, PACCAR repurchased 570,000 of its common shares for $22.6 million. With this, the company has repurchased 4.99 million shares for $192.0 million under the Board-approved authorization of $300 million of stock repurchases.

Financial Position

PACCAR’s cash and marketable debt securities amounted to $2.6 billion as of September 30, 2012, compared with $2.9 billion as of December 31, 2011. Long-term debt was flat at $150 million compared with the corresponding period of 2011.

Cash from operations decreased to $916.6 million for the first nine months of 2012 from $1.2 billion in the same period of 2011 despite an increase in profit. The decline in cash flow was attributable to increase in sales-type finance leases and dealer direct loans on new trucks as well as unfavorable changes in other operating activities. Meanwhile, capital expenditure for the same period increased to $334.6 million from $214.7 million in the first nine months of 2011.

Our Take

PACCAR is the third largest manufacturer of heavy-duty trucks (with a capacity of more than 15 metric tons) in the world after Volvo (VOLVY) and Daimler (DDAIF), and has substantial manufacturing exposure to light/medium trucks (with a capacity of 6–15 metric tons). The company also provides customer support for its products with the supply of aftermarket parts, finance and leasing services.

Due to the sluggish growth in the U.S. and economic weakness in Europe, the company currently retains a Zacks #5 Rank on its stock, which implies a short-term (1–3 months) Strong Sell rating.

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