Reader Email: Paccar Trucks
You Ask You wrote favorably about Paccar (PCAR) on thebulltrader.com -- talk to me some more about the stock.We Reply PACCAR makes medium-duty (class 6-7) and heavy-duty (class 8) trucks under the Peterbilt and Kenworth names in the US and the DAF and Foden names in Western Europe. Its class 8 market share is around 23% in the U.S. and 14% in Europe. It also has a financial segment that provides services such as financing arrangements and full-service leasing to dealers/customers.
We view PCAR as a diamond ring hiding in a landfill of garbage. It's a pure play on the truck manufacturing segment that goes for less than 12 x EPS, attractive when you look at how the firm has grown EPS 45% over the last 3 yrs [on an annualized basis]. Analysts are cheerleading for the stock (2 buy, 3 hold, 0 sell) and we take awe at gross margins (21%) that are almost 5 x what the industry pumps out; operating margins of 12% rip the cover off the ball and attest to the firm's efficient cost structure, which some have even compared to Dell's (DELL). Overall, this is a mispriced, quality name with a mean penchant for productivity-enhancing R&D. We see the stock shooting higher but would warn the less risk-tolerant that tighter emission controls in 2008-2010 could weigh negatively on shares. With $2B in cash, negligible debt, and a FCF yield (free cash flow/revenues) of about 5%, Paccar is a stock you want to pounce on now -- it will even pay you a buck twenty a share so that you don't cry or hit the road during downcycles. Our long term price target is $94, a 13% premium to Monday's closing price.
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