We have retained our Neutral recommendation on PACCAR Inc. ((PCAR - Analyst Report) ). The company is experiencing strong truck sales and improved sales for aftermarket parts. However, tough competition in the Class 8 truck markets and the Financial Services segment undermine its results.
In the second quarter of the year, PACCAR reported a profit of $239.7 million or 65 cents per share that more than doubled from $99.6 million or 27 cents per share in the prior-year quarter. However, the truck maker’s profit missed the Zacks Consensus Estimate of 68 cents per share.
The improvement in profit reflected strong truck sales in North America and Europe and better aftermarket parts sales and financial services results worldwide. However, the company’s suppliers faced difficulty while catering to the robust increase in truck build rates.
Revenues in the quarter surged 61% to $3.96 billion, up from the Zacks Consensus Estimate of $3.58 billion. Revenues in the Truck and Other segment shot up 66% to $3.70 billion. The pre-tax profit in the segment improved significantly to $286.4 million from $110.3 million a year ago.
PACCAR’s market share has been robust, especially with its DAF nameplate. In the first half of 2011, the company’s DAF nameplate achieved a market share of 15.3% in the above-15-tonne market.
The company faces three principal competitors in the U.S. and Canada Class 8 truck market, one of them being Navistar International Corp. ((NAV - Analyst Report) ). The company’s Class 8 retail market share in the U.S. and Canada stood at 26.7% in the same period.
In Europe, PACCAR has five principal competitors in the commercial vehicle market, including the parent companies of its two competitors in the U.S. and Volvo AB ().
Revenues in PACCAR Financial Services (PFS) rose 8% to $258.0 million. Pretax profit improved to $56.9 million from $34.0 million in the second quarter of 2010 led by better finance margins and reduced credit losses. The provision for credit losses went down to $11.0 million from $17.4 million in the second quarter of 2010.
Although PFS boosted the company’s results, it is exposed to lower margin and truck repossessions. In the segment, PACCAR competes with banks, other commercial finance companies and financial services firms, which may have lower costs of borrowing and higher leverage or market share goals. This could lead to decreased margins, lower market share, or both.
PACCAR expects industry sales in the above 15-ton truck market in Europe in the range of 230,000-250,000 units for 2011. The company anticipates industry retail sales in the Class 8 truck markets of U.S. and Canada in the range of 180,000-200,000 vehicles in the year.
The company has targeted capital investments of $400-$500 million and R&D expenses of $275-$300 million for 2011 in order to develop new products and enhance its manufacturing efficiency.