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Can Paccar (PCAR) Transport your Portfolio Higher?

Tuesday, May 8th, 2018

I recently became very excited about this company’s prospects. While reading conference calls from our consumer goods companies, I noticed a common theme. They all discussed the strength of the economy and the confidence of the consumer. This translated into increased demand, but they all mentioned a similar problem. The cost of transportation, such as freight would be a headwind as the economy continues to chug along. This got me thinking about different companies which could benefit from this transportation shortage.

Paccar does not directly benefit from the cost of transportation, but it manufactures trucks and supplies parts. With the need for more freight transportation, the demand for trucks should increase and with the increased amount of road time the demand for replacement parts should also increase. These would be of great benefit for Paccar. The company sells its trucks under the Peterbilt, Kenworth, and DAF brands.

I was also excited to see the company fell from its 52-week high of $79.69/share and now trades at $64.50/share. This nearly 20% fall in the stock price perhaps opened an opportunity to buy a great company on sale.

I always point out, a decline in the stock price does not mean the company is now trading at a good value, it is important to first check the valuation ratios to determine if the decline has presented a valuable opportunity. The current P/E ratio of 13.4 is favorable to the industry average of 114.32; Price/Sales of 1.1 is expensive compared to the industry average of 0.5; Price/Tangible of 2.6 is higher than the industry average of 2.2; and Price/Cash Flow of 7.9 is also above the industry average of 4.6. While the valuations do not look great, I am satisfied by the numbers as they do present good values. It is always important to understand the numbers you are analyzing. While looking at the industry average, the comparisons do not thrill me. Paccar is placed in the Auto & Truck Manufacturers industry, which places its numbers against company’s such as Ford, GM, Fiat Chrysler, and Tesla. Tesla for one distorts the industry average because its numbers are so outlandish that it does not even come close to the industry average. Another issue I have, is selling passenger vehicles is a lot different than selling semis and other commercial vehicles. Anyone can read the numbers, but it is important to understand how to properly interpret the numbers.

Paccar pays a quarterly dividend of 1.7% and it uses just 29.9% of its earnings to pay out that dividend. The company has also historically paid an annual dividend in December on top of its quarterly dividend. For example, it paid a one-time dividend of $1.20 in December of last year on top of its quarterly dividend of $0.25. This increases the company’s annual dividend yield and excites me as an investor. It’s almost like a nice Christmas present. The only issue is the dividend varies from year to year.

With the improving economy, the growth rates have been phenomenal as sales have increased 23.0% over the last 12 months and EPS has risen 19.0% during the same time frame.

The balance sheet looks a little strange as the current ratio of 4.7 shows the company has great liquidity, but Debt/Equity of 106.6% is somewhat concerning. On the surface it appears to be a problem, but after further research the company finances its trucks which skews the balance sheet. When looking at the 10-K, we found the trucking portion of the business has little debt. I was thrilled with this company’s balance sheet after looking closely at the numbers.

If I look forward to December 2019, estimated GAAP EPS of $5.63 would give us a target sell price of $92.90. This would be an estimated return of nearly 45%. This company has a lot to offer based on the initial research, and I believe it is well-worth your time to gain a better understanding of this company.

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