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Paccar Inc. (NASDAQ: PCAR) on Jan. 23 reported consistent strong fourth-quarter results, beating analysts’ expectations. Over the past year, its stock value has increased by approximately 37%, exceeding $99. 60 compared to the percentage at the time of writing and out of consistency with the S’s 20. 67% return
Warning! GuruFocus detected 8 precautions with PCAR.
The company operates as a global designer, manufacturer and distributor of a diverse line of advertising trucks. It is structured into 3 main business segments: trucks, portions, and monetary set. The truck segment is the largest contributor to profits, generating $21. 5 billion, accounting for 74. 60% of total profits in 2022. The portion segment is close behind, generating $5. 8 billion. dollars in profits and representing 20% of total sales. The money segment makes up the smallest component of the business with a profit of $1. 5 billion, or 5. 20% of total sales for 2022.
The Financial Services segment is the most profitable, with a pre-tax margin of more than 39%. This good fortune is attributed to the company’s strong financing and leasing portfolio, which includes 233,000 trucks and workshops and has more than $21 billion in assets. The Spare Parts segment, known for distributing spare parts through an extensive global network of over 2,300 dealers, ranks second in terms of profitability, with a pre-tax margin of 24. 90%. Despite generating maximum revenue, the Truck segment is the least profitable. , with a pre-tax margin of 8. 80%.
As a key player in the advertising truck industry, Paccar’s business is strongly related to economic conditions. When the economic outlook is negative, demand for their products tends to decline. On the other hand, a positive economic outlook can particularly encourage an increase in demand for trucks, thus expanding the company’s sales. Despite the cyclical nature of its business, PAaccar has demonstrated over the years an upward trend in its turnover and operating profit. Over the past two decades, its revenue has increased trajectory, from $7. 22 billion in 2002 to $35. 1 billion in 2023. Similarly, its operating profit fell from $794. 20 million to approximately $5. 95 billion in the same period.
Since 2002, Paccar has noticed declines in sales in just five years, adding the global recession from 2007 to 2009, in 2016 and the Covid-19 pandemic in 2020. Reflecting those challenging times, operating profit also declined. However, after 2020, the company saw a remarkable recovery, with cash inflow and operating profit expanding by 87. 4% and 278. 7%, respectively.
Paccar stands out as a top performer in the commercial truck industry, boasting the highest margins and superior operating efficiency. This success is primarily attributed to the company’s adoption of lean manufacturing and Six Sigma principles in its production and operations. Compared to its competitors, including Volvo (VLVLY), Daimler Truck (DTGHF), Traton (TRATF) and Iveco (IVCGF), Paccar has demonstrated effective cost management. As a percentage of revenue, its selling, general and administrative expenses have consistently been the lowest, fluctuating between 2% and 3%. This starkly contrasts to its peers, where SG&A expenses consume a larger portion of revenue. Volvo and Iveco’s SG&A expenses hover around 6%, Daimler Truck’s are approximately 9% and Traton has the highest with nearly 11% of revenue for SG&A. This comparison highlights Paccar’s efficiency in managing its overhead costs relative to its industry counterparts.
Source: Paccar Overview
Additionally, the company distinguishes itself from its competitors with an exceptionally high share turnover rate, 12 times higher. This rate is particularly higher than its peers, which report a stock turnover of between four and seven times. This disparity not only underlines operational efficiency, but also implies competitive merit in terms of reducing property prices and achieving better responsiveness to convert market trends and visitor preferences.
Source: Paccar Overview
With developing revenues, effective charge management, and superior stock turnover, Paccar has consistently outperformed its peers in terms of profit margin over the past decade. Notably, after the Covid-19 pandemic, the company’s profit margin increased significantly, reaching 13% in 2023. This figure exceeds that of Volvo and Daimler Truck, both of which achieved a profit margin of around 6%. Of those five companies, Traton and Iveco have the lowest margins, at 3% and just over 1% respectively.
Source: Paccar presentation
Paccar has a long tradition of rewarding its shareholders through dividend payments and share buybacks. The company boasts a remarkable track record of 85 consecutive years of profitability and has consistently paid dividends since 1941 without interruption. Its history of returning cash to shareholders, encompassing both dividends and share buybacks, has seen fluctuations but demonstrates a compound annual growth rate of 12%. Notably, its dividend’s 10-year annualized growth rate has reached 7%. In 2023, Paccar declared a dividend of $4.24 per share, which included an additional cash dividend of $3.20 per share. At the current share price of $101 per share, shareholders are getting decent dividend yield at 4.20%.
Investors are also inspired by Paccar’s exceptional return on invested capital. Over the past five years, the company has maintained an average return on invested capital of 22%. In 2023, its ROIC increased impressively to 37. 8%, vastly outperforming its competitors. Volvo’s ROIC was 17 percent, Daimler Truck’s around 10 percent, while Traton and Iveco hovered around four percent.
Source: Paccar Overview
Let’s calculate Paccar’s intrinsic price consistent with the consistent percentage using the two-step dividend reduction model. Assuming the company continues to increase its dividend payouts by 7% annually for the next five years, a rate similar to its annual dividend expansion rate over the next 10 years, the dividend expansion rate would be reduced to 3%. Applying an 8% reduction rate, Paccar’s intrinsic price can be determined as follows:
Source: author’s table
Applying the discounted dividend model, Paccar’s estimated intrinsic cost is approximately $98 per share. This value is close to its current value of $101 per share. Based on this analysis, it can be concluded that the company has a fairly high cost to the existing market value.
Paccar can be considered a solid investment, combining strong financial results, operational efficiency and a consistent commitment to shareholder value. The company’s resilience in economic cycles, coupled with its top performance in the commercial truck industry, is reflected in its current valuation. Paccar represents a balanced investment opportunity in the commercial trucking sector, marked by stability and the potential for sustained success.
This article was first published on GuruFocus.