PACCAR Inc

Date: June 26, 2024.

Company’s Overview

PACCAR Inc. (PCAR) is a global leader in the design and manufacturing of light, medium, and heavy-duty trucks. They operate worldwide, with their Kenworth, Peterbilt, and DAF brands serving customers across various markets. Their core business revolves around selling trucks, advanced diesel engines, aftermarket parts, and providing related commercial vehicle services.

Competition

PACCAR Inc. operates within the Construction Machinery and Heavy Trucks industry, which is composed by:

Revenue Segments

The Company’s net sales proportions by segment for the most recent quarterly report are composed by:

The Company’s Comparison of total net revenues by segment from 2019 till 2023:

Related Risks

PACCAR Inc. navigates a landscape with several challenges. Economic downturns can trigger a domino effect, as businesses tend to postpone or reduce purchases of trucks during recessions, impacting PACCAR’s sales and profitability. Disruptions in the global supply chain can lead to material shortages and hinder their production and delivery timelines, potentially increasing costs if they need alternative sourcing. Fluctuations in commodity prices, like steel and aluminium, can squeeze their profit margins. The commercial truck market is fiercely competitive, demanding constant innovation and competitive pricing to maintain their market share. Additionally, evolving regulations related to emissions standards and fuel efficiency can necessitate costly modifications to their trucks to comply with the latest requirements.

Financial Performance

Revenues

Revenues from 2020 to 2023:

• PCAR’s annual revenue for 2023 was $33.3155B, a 21.97% increase from 2022.
• PCAR’s annual revenue for 2022 was $27.3143B, a 25.1% increase from 2021.
• PCAR’s annual revenue for 2021 was $21.8345B, a 27.28% increase from 2020.
• PCAR’s annual revenue for 2020 was $17.1543B, a -28.88% decrease from 2019.

The yearly revenue from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Net Income

Net Income from 2020 to 2023:

• PCAR’s annual net income for 2023 was $4.6008B, a 52.77% increase from 2022.
• PCAR’s annual net income for 2022 was $3.0116B, a 61.44% increase from 2021.
• PCAR’s annual net income for 2021 was $1.8655B, a 43.37% increase from 2020.
• PCAR’s annual net income for 2020 was $1.3012B, a -45.51% decrease from 2019.

The yearly net income from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

EPS

EPS from 2020 to 2023:

• PCAR’s annual EPS for 2023 was $8.78B, a 52.43% increase from 2022.
• PCAR’s annual EPS for 2022 was $5.76B, a 60.89% increase from 2021.
• PCAR’s annual EPS for 2021 was $3.58B, a 43.2% increase from 2020.
• PCAR’s annual EPS for 2020 was $2.5B, a -45.53% decrease from 2019.

The yearly EPS from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Free Cash Flow

Free Cash Flow from 2020 to 2023:

• PCAR’s annual free cash flow for 2023 was $2.9275B, a 78.89% increase from 2022.
• PCAR’s annual free cash flow for 2022 was $1.6365B, a 195.45% increase from 2021.
• PCAR’s annual free cash flow for 2021 was $0.5539B, a -58.93% decrease from 2020.
• PCAR’s annual free cash flow for 2020 was $1.3488B, a 51.64% increase from 2019.

The yearly free cash flow from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Financial Strength

Shares Outstanding

On December 4, 2018, PCAR’s board authorised a share repurchase program of up to $500M of its common shares.

While the decrease in shares outstanding (almost 4% since 2009) is a positive aspect, it’s a moderately sized reduction. Ideally, for a higher ranking, we’d see a more significant repurchase program to further benefit shareholders through increased earnings per share (EPS).

Assets/Liabilities

Their asset-to-liability ratio of 1.72 sits comfortably above the desired level of 1:1, indicating a healthy buffer of assets compared to their debts. This financial cushion allows them to invest in growth initiatives and weather economic challenges.

Current Ratio

An even brighter spot is their current ratio of 2.7, exceeding the recommended level of 1.5 significantly. This signifies they have ample current assets (like cash and inventory) to cover their short-term liabilities (like accounts payable) in the short term.

Net Debt

Their net debt of $5.8 billion, while not insignificant, is a relatively small amount compared to their overall financial picture. Furthermore, the decrease in net debt by almost 5.6% since 2019 demonstrates their commitment to reducing liabilities and improving their financial health. The net debt also represents a moderate portion (around 25%) of their total liabilities, providing additional comfort.

Valuation

Based on the analysis performed, PCAR’s price is undervalued, showing a fair price of $112 (As at 17.05.2024). As key metrics, we considered 10% Required Rate of Return (RRR) and 20% margin of safety. Note that in the analysis we take into consideration also the cash and cash equivalents and the total debt.

The company has received a range of ratings from buy to sell. Specifically, there were 5 buy, 1 overweight, 12 hold, 1 underweight and 1 sell ratings. The consensus rating leans towards hold.

PACCAR presents a compelling case for a financially sound company. Their revenue, net income, and free cash flow have all grown steadily over the past decade, with a 10-year CAGR of 5.78%, 12.97%, and 2.8%, respectively. This growth trajectory is impressive and signifies a well-managed company. They boast exceptional profitability metrics, exceeding industry medians, with a net margin of 14.3% (vs industry median of 9.2%). Additionally, their financial strength is undeniable. A good asset-to-liability ratio (1.72), a very good current ratio (2.7), and a manageable net debt of $5.8 billion (which has also been decreasing) provide a solid foundation for future growth. Their stock appears to be modestly undervalued with a P/E ratio of 11 compared to the industry median of 15.54. This could be an attractive entry point for investors seeking value.

However, a potential concern is their dividend payout ratio. Dedicating a significant portion (around 52%) of their free cash flow to dividends might limit their ability to invest in future growth initiatives. Ideally, a more balanced approach would allow them to reinvest profits while still rewarding shareholders. Additionally, their gross margin (21.56%) falls short of the industry median (25.47%), suggesting there might be room for operational efficiency improvements.

Despite the high dividend payout and a slightly lower gross margin, PACCAR’s financial health and growth potential are undeniable. With a strong financial foundation, a track record of growth, and a potentially undervalued stock, PACCAR is a good option for investors seeking a stable company with solid growth prospects. However, investors who prioritise companies with a higher focus on reinvesting profits for future growth might want to consider other options.

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Disclaimer

Please note that I am not a licensed financial advisor and the information provided here should not be construed as financial advice. I am simply sharing my understanding of the topics based on my research and personal experiences. It is always advisable to consult with a qualified financial advisor before making any investment decisions.

The information I provide is based on publicly available sources and my own interpretations. I strive to provide accurate and up-to-date information, but I cannot guarantee the correctness or completeness of the information.

Any opinions expressed here are my own and do not necessarily reflect the views of any other individual or organisation.

Please use your own judgement and conduct your own research before making any investment decisions.