Truck Manufacturer Paccar Posts $373 Million Second Quarter Profit

July 25, 2017 by Tiffany Hsu, @tiffkhsu

Truck manufacturer Paccar Inc. logged a better than expected profit in the second quarter as the market for heavy-duty vehicles started to improve.

The Bellevue, Wash., company said Tuesday that its $1.06 per-share net income for the second quarter — though lower than its $1.37 per-share profit from the same period a year earlier — exceeded Wall Street estimates of 99 cents per share.

Paccar reported a second quarter profit of $373 million, a 22 percent decline from the $481 million earned in the same period a year earlier.

The company’s $4.7 billion in revenue surpassed its $4.41 billion in revenue from the year-earlier period by 6.6 percent. The improvement stemmed in part from increasing North American truck production and strength in the European market.

“The quarterly results themselves demonstrated consistent performance from a company that seldom makes operational mistakes,” said Alexander Potter, an analyst at Piper Jaffray & Co. “Other than persistently low financial services margins due to depressed used truck values, there weren’t many concerning issues in the quarter.”

The company is known for its Kenworth and Peterbilt heavy-duty trucks, which in the second quarter claimed 31.7 percent of all Class 8 orders in the U.S. and Canada and 29.6 percent of all retail sales.

But in a conference call with analysts Tuesday, Chief Executive Ronald E. Armstrong said that 2017 could end up a record year for sales of Paccar’s medium-size trucks.

A steady economy and high levels of freight tonnage had Paccar so optimistic that it raised its sales projections. The company now anticipates the industry will sell 290,000 to 310,000 units in its above-16-ton segment in Europe this year, up from its earlier range of 270,000 to 300,000 units.

For Class 8 vehicles in the U.S. and Canada — which enjoyed a 44 percent year-over-year boost in orders in the first half of the year — Paccar broadened its estimated industry sales range to 200,000 to 220,000 units, up from a low-end forecast of 190,000 units.

Paccar also said it did well in its other business segments, such as financing, where revenue swelled to $306.3 million from 297.4 million year over year. Used truck demand nationwide increased throughout the industry, and Paccar was no exception.

Resale values for Peterbilt and Kenworth trucks regularly commanded a 10-percent to 20-percent premium over competitors, according to Paccar executives.

Parts sales also surged, with a 9 percent year-over-year jump in revenues to $823.1 million.

“Nearly all the commercial vehicle companies we cover have stated initiatives to grow their parts businesses, but we believe that Paccar is in a stronger position than most industry participants to actually do so,” Michael Baudendistel, a Stifel Financial Corp. analyst.

The company is capitalizing on the growth in the number of its Kenworth and Peterbilt trucks in operation that are equipped with Paccar’s MX engine. They are entering the maintenance-intensive part of their life cycle, he said.

Paccar also is opening retail locations that sell parts and is increasing the scale of its parts distribution capabilities. To expand its global sales network, for example, Paccar plans to open a $35 million, 160,000-square-foot distribution center in Toronto in mid-2018.

The company added 1,200 employees this year and now has a headcount of 24,500 workers.

Paccar’s physical footprint is also changing, with a $110 million robotic painting facility opening in Belgium in June. In 2018, the company’s Dynacraft division will start making battery cables, doors, air conditioning modules and other components at a 130,000 square foot manufacturing plant in McKinney, Tex.

Paccar is also setting up a Silicon Valley innovation center in Sunnyvale later this year. The facility will explore next-generation technologies, such as autonomous driving, truck platooning, vehicle connectivity, augmented reality and integrated software systems.

“We’re currently in that assessment phase of evaluating the best path for our company, and part of opening this office is getting greater and more immediate access to the technologies so we can be better informed,” Armstrong said.

So far, advanced driver-assistance systems that use cameras, radar and other technologies to avoid collisions are already available, he said. But other innovations will take some patience.

“For the next decade, we’re going to have a majority of non-autonomous trucks on the street — it’s going to be a relatively gradual transition over time,” Armstrong said. “As for batteries, there has to be a breakthrough in battery technology for it to be an economically viable solution for heavy-duty trucks.”

Still, Paccar executives said the company has invested $6.2 billion in research and development in the past decade, with up to $425 million in capital and $270 million in expenses dedicated this year to new product design, enhanced manufacturing and aftermarket support.

“It’ll be pretty steady, with a slight increase over time,” Armstrong said of future R&D funding.

By the close of trading in New York Tuesday, Paccar shares fell 50 cents, or about 1 percent to $68.84.

“Investors had already expected a bullish tone,” Potter said in a report to investors. “Indeed, considering the stock’s flattish reaction to an otherwise strong quarter, it seems that the valuation has relatively little room to expand. Our price target remains $66.”

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