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Introduction
PACCAR (NASDAQ:PCAR) is currently undervalued, offering an appealing opportunity for lasting expansion; their innovative initiatives in alternative fuel and autonomous trucks set them apart. Moreover, the potential for short-term growth in 2024- linked to the normalization of semiconductor supply disrupted during the COVID-19 pandemic- adds a dynamic element to PACCAR's investment story. These factors lead me to recommend investors buy PCAR.
Supply Chain Normalization
PACCAR showed resilience during the pandemic
When the pandemic lockdowns began in 2020, the world came to a halt. Many businesses halted operations and the economy crashed. Over 200,000 establishments closed down completely. The trucking industry saw a major decrease in revenue as companies purchased fewer trucks.
PACCAR weathered the storm well compared to competitors; their cash reserves and expense management allowed them to keep a strong balance sheet in 2020. Notably, they managed to keep long-term debt roughly equal, and short-term debt decreased by 18.6% at a time when many companies were forced to increase borrowings tremendously.
And despite decreased revenue during this time, PACCAR was able to grow its total market share by about 1% in 2020 according to statements in their 2020 10-k:
Overall, PACCAR's long-term success was not negatively impacted by COVID.
Supply chain shortages
Although PACCAR was able to maintain a strong balance sheet during COVID, they have seen decreased new truck sales since 2020.
This decrease in sales is due to the supply-chain shortages of semiconductor chips required to build automobiles. The chip shortage has constrained PACCAR's production capacity, preventing the company from meeting customer demands. This has created pent-up demand that should lead to increased sales with the normalization of chip supply in 2024.
This decrease in sales in 2020 led to a revenue loss of about 27%. However, PACCAR recovered in 2021 & 2022 with revenue growth of 25.6% and 22.5% respectively. In 2022, PACCAR surpassed its 2019 revenue and gross profit.
Sustainable Growth with High-Tech Trucks
Trucking Industry
Trucking drives the supply chain around the world, accounting for 74% of freight transported. Nearly all businesses rely on the trucking industry in some way to deliver products and supplies.
While there may be changes in trucking technology, especially with efforts to reduce carbon emissions, trucking is here to stay. PACCAR has proven that they are resilient to adversity and adaptable to change.
The Electric-Vehicle (EV) market
The entire automobile industry is changing with increased customer demands for environmentally friendly vehicles and widespread interest in autonomous vehicles. This boom has led Tesla (TSLA) to become the 9th largest stock by market cap. At the same time, PACCAR has been investing in alternative energy trucks for years without receiving much attention. This is likely due to CEO Preston Feight's patient approach to the EV market. Rather than diving in too quickly and potentially hurting the company, Feight is gradually increasing their development of sustainable vehicles. PACCAR is strategically approaching the electric vehicle shift with a patient mindset, carefully testing the market and ensuring the development of high-quality trucks that stay true to the PACCAR brand
We think that the EV market, the zero-emissions vehicle market, will just gradually grow. We're well positioned for that growth. And we have some fantastic vehicles out there that are providing great experiences. -Preston Feight
Currently, PACCAR has 9 electric models for sale. They've partnered with several leaders in electric vehicle technology, including Shell, Toyota, Chargepoint, Entech, and Schneider. Through these partnerships they have started a global effort to increase charging infrastructure.
They've also partnered with Accelera by Cummins, Daimler, and Eve, to form a joint venture that will advance production of lithium-iron-phosphate (LFP) batteries. LFP batteries offer several benefits including lower cost, longer life, and advanced safety. LFP batteries may be the solution to many of the issues posed by traditional lithium batteries used in EVs. This partnership allows PACCAR to have the necessary scale to advance LFP technology and still profit. PACCAR invested $3Billion in this venture for 30% ownership.
While PACCAR currently has 9 models currently available for purchase, TSLA is still lagging on production of the Tesla Semi that they promised would arrive in 2019. Their latest quarterly earnings show zero production capacity for the Tesla Semi.
Hydrogen Fuel Cell Trucks
PACCAR is collaborating with Toyota on further innovations, particularly focusing on the development of hydrogen fuel cell trucks. Hydrogen is the most abundant element in the universe and with fuel-cell technology can be used to power trucks that create zero carbon emissions. The major constraint with hydrogen-powered trucks is the ability to transport the element but recent technology advancements have largely overcome those issues. The incorporation of hydrogen fuel-cell trucks enables PACCAR to broaden its range of zero-emission vehicles, catering to applications demanding extended journeys and rapid refueling.
PACCAR recently completed a pilot program using ten Kenworth T680 FCEVs at the Port of Los Angeles that showed remarkable success. They have begun accepting deposits for the new truck and will begin delivery in 2024.
Autonomous vehicles
In 2021 PACCAR partnered with Aurora to develop and commercialize autonomous Peterbilt and Kenworth trucks. This partnership should help push PACCAR ahead of competitors as truck drivers seek new technology over the years.
PACCAR's commercial launch of autonomous trucks was set for 2023 but was delayed due to supply-chain shortages. This delay was likely linked to the semiconductor shortage that is now all but resolved. We can expect the rollout of autonomous trucks in 2024 which will further increase the value of PACCAR.
Investor Friendly
PACCAR is committed to providing value for investors. They have paid quarterly and annual dividends each year since 1941, with an average dividend yield of 3.6%. This is a healthy dividend strategy for a company at its stage. PACCAR also strategically engages in stock buybacks to reward investors. In 2017 PACCAR recorded $833 million in fines to the EU after a lost legal battle. When the stock price dropped in 2018, PACCAR repurchased $300 million in shares to protect investors.
PACCAR is also historically a sound investment. They have been profitable for 84 consecutive years and have had an average free cash flow of $1.37Billion annually since 2009.
What this means
The world is shifting away from fossil fuels. With societal pressure, government regulations, and consumer demands all pushing for clean energy, the trucking industry must evolve to remain competitive. PACCAR has the experience, talented management, and scale to make the shift to clean-energy trucks and has proven over the past 3 years that it will continue to be a leader in the trucking industry.
Valuation
PACCAR is an old company with very consistent dividends and growth making it a good candidate for valuation using a discounted growth model (DGM). DGM is calculated as expected dividend per share / (required rate of return - dividend growth rate)
- Beta: 0.87 Calculated using regression analysis weekly adjusted closing prices for PCAR and the S&P 500 over the past 10 years.
- Cost of Equity: 9.20%. Calculated using capital pricing asset model (CAPM). Risk free rate is the interest rate on 10Y Treasury bonds. Expected market return (E(Rm)) of 10%. E(Rm) is difficult to predict due to recent market volatility. 10% was chosen because it is close to the overall average return of the S&P 500.
- Dividend: $2.80. The 2022 declared dividends per share.
- Dividend growth: 6.7%. The 10Y average growth
Target price: $111.98
Using a discount growth model gives a target price of $111.98. This indicates that PCAR is currently undervalued trading at $97.65.
Other valuation models
A regression analysis shows a beta of 0.87 indicating that PCAR is less volatile than the market. A beta of less than 1 suggests that holding PCAR may reduce your portfolio's systemic risk.
PCAR also had an alpha over 1, indicating that it has outperformed the market when adjusted for risk.
Analysis Risks
This analysis faces the following risks:
- Relies on data published by PACCAR. Some of the data in this article was published by PACCAR. If PACCAR published false information or manipulated financial reports this analysis could be flawed.
- Predicts that supply-chain shortages will ease. This analysis assumes that supply-chain shortages will ease going into 2024. If supply chain issues persist, revenue projections could be inflated.
- Assumes that market is moving towards sustainability. If the market has less demand for clean energy than PCAR predicts, PCAR could suffer.
- Valuation relies on historical data and estimations. The target price is created using historical PCAR and S&P 500 returns, as well as estimated market growth rates. If any of these values are off the target price could be inaccurate.
Conclusion
PACCAR remains a robust contender for sustained growth within the heavy-duty truck manufacturing sector. The company demonstrated resilience during the disruptions caused by the COVID-19 pandemic, displaying skilled financial management and an ability to navigate challenging market conditions.
The significant decline in new truck sales due to supply-chain shortages is evident; however, with projections indicating the normalization of shortages by 2024, PACCAR stands ready for substantial growth fueled by pent-up demand.
PACCAR's venture into the electric vehicle market is characterized by a careful and well-thought-out strategy, contrasting with the rapid developments seen in the overall industry. Collaborations and partnerships in the EV, hydrogen fuel cell, and autonomous vehicle domains signify a forward-looking stance that aligns with the evolving landscape of clean-energy trucks.
The investor-friendly practices, such as consistent dividends and stock buybacks, highlight PACCAR's commitment to shareholder value. Valuation models suggest an undervaluation, further enhancing its appeal as an investment prospect.
While acknowledging inherent risks tied to data reliance and market dynamics, the overall outlook for PACCAR appears optimistic, positioning the company favorably for enduring success amidst the transformative shifts in the trucking industry. Investors should monitor the company's strategic advancements in sustainable technology and be prepared to capitalize on opportunities that arise.
Jodon Montgomery
I'm a college senior majoring in finance with an interest in long/short equity and options trading. My entry into the world of investing began in university, where I developed a passion for understanding financial markets and making informed decisions. I use fundamental analysis to evaluate stocks for long positions. In options trading, I employ a credit strategy for high-volume options with low probability of expiring ITM. In terms of my writing on Seeking Alpha, I am motivated by the desire to share my insights and analysis with the community. I aim to contribute valuable content that not only reflects my understanding of finance but also provides practical insights for fellow investors. Expect articles covering topics such as market trends, investment strategies, and the application of financial theories in real-world scenarios.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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