PACCAR’s (NASDAQ: PCAR) earnings came in strong for the fourth quarter. But more importantly, what also came in strong for the company in its earnings announcement and its call with investors was its projections for the truck market going into 2019.
Here are some of the highlights from the builder of Peterbilt, Kenworth and DAF vehicles:
– Class 8 truck retail sales in North America last year were 285,000 vehicles, a jump of 30 percent from the prior year, according to Preston Feight. PACCAR’s forecast for 2019 is 285,000-315,000 trucks. A report by Ross Gilardi at Bank of America Merrill Lynch, released after the earnings report but before the earnings call, said PACCAR’s prior forecast for North American sales had been 5,000 vehicles less than that on both low and high estimates. Sales in Europe in 2018 for trucks above 16 metric tons were 319,000. That number is near the high end of PACCAR’s European projection for 2019, which is 290,000-320,000 and was not changed.
– PACCAR’s own deliveries were 50,400 trucks in the fourth quarter, up 6 percent from the third quarter. That figure is worldwide, and PACCAR said its European numbers were boosted by more build days in Europe. But PACCAR also cited better supplier performance, an issue that dogged original equipment manufacturers (OEMs) for most of 2018. Ronald Armstrong, the company’s CEO, said on the conference call that the performance by suppliers in January was “the best we’ve seen it in a couple of quarters,” according to a transcript of the earnings call supplied by SeekingAlpha. “They’ve gotten their legs under them and so we’re working closely with them to be able to support the progression of build that we want to achieve during 2019,” he said.
– For the year, PACCAR delivered 189,100 vehicles, which was a record. Its market share for DAF in Europe was 16.6 percent, compared to 15.7 percent a year earlier, which the company said is also a record.
– As various reports kept coming in through 2018 with eye-popping order book numbers for Class 8 vehicles, the question arose just how long could it go on. Armstrong said he continues to see strength in the order book. The orders for Class 8 last year were “super normal… abnormal.” Dealers in the PACCAR network are confident they’ll be able to deliver that backlog, Armstrong said, “and very confident about orders that will continue to fill in the openings that are there.” PACCAR has been taking orders for 2020, he said, and industry conditions are “very positive.” Harrie Schippers, the company’s CFO, said cancellations from the order book have been mostly cancellations that result in a reorder, “so a dealer changes the type or the customer for a truck, but not any significant cancellations so far.”
– The sales orders in Europe are also very strong. Armstrong said the Europe-wide order book has been above 300,000 for three consecutive years and may top it again in 2019. “So we’re starting the year in a real positive vein with where we’re at,” he said.
– Cost inflation is not surpassing vehicle inflation, according to Michael Barkley, the company’s controller. Vehicle pricing was up about 2 percent in the fourth quarter compared to the second and third quarters. Barkley said costs were up about 1.6 percent, “so we had some positive price realization during the quarter.” And PACCAR says it’s confident that pricing will hold. As Armstrong said, the orders for the company are “pretty well in house” for 2019, “so we know what the pricing is.” With that pricing, PACCAR expects its margin will be about 14.5 percent in the first quarter and hold in a 14 to 15 percent range for the year.
– In terms of financial performance, net quarterly sales and revenues were $6.28 billion, a record. Net income was $578.1 million for the quarter, also a record. The company’s earnings per share of $1.61 was above consensus of $1.53 but much of that was because PACCAR exceeded expectations out of its Financial Services division and its investment income. The Merrill Lynch report said PACCAR’s gross margin of 14.2 percent was up 50 basis points year-on-year but was less than earlier management guidance of about 14.5 percent. “Investors will be focused on whether PACCAR expects gross margin to improve in 2019 and the company’s ability to raise new truck pricing,” Gilardi wrote. (As noted, management did see margin this year as high as 15 percent but as low as 14 percent.)
– Merrill Lynch maintained its neutral stance on PACCAR with a price objective of $63 per share. It is trading near $64 now but that is after a $3.54 per share gain on Tuesday, the day of the earnings release, to $64.84. In its report, Merrill Lynch said upside potential for PACCAR includes a “faster than expected recovery in used truck pricing,” and other occurrences that would be expected: M&A activity, a better European economy and improved margins. The downside risks are macroeconomic – a global trade war – or more granular issues, such as continuation and worsening of the driver squeeze that could lead to orders being delayed.