Summary
PACCAR Inc. (NASDAQ:PCAR) specializes in the production of trucks of varying sizes and weight classes, as well as the distribution of replacement parts for these vehicles. PCAR is set to continue performing better over the long-term due to its PCAR’s brand-new truck models that should increase market share and profit margins. The company’s move toward alternative drivetrains, which diversifies its supply chain, is also evidence of the maturity and foresight of its management. Last week, PCAR announced its 1Q23 results, and they were spectacular. I expected this to cause a substantial increase in the stock price. However, share price movement were pretty much muted, which I believe is mostly pressured by the weak and uncertain macro environment. To put things into perspective, PCAR’s Truck, Parts and Other [TP&O] gross margin of 19.3% was a huge beat, and management’s guidance for 18-19% gross margin in 2Q23 suggests FY23 is going to be a fantastic year. Importantly, this “new” margin profile is going to have lasting impact on how the market values PCAR over the long-term given the business now has a structurally higher margin profile. While I agree that it is safer to take a safer stance today with regards to the weak macro, I believe there is enough visibility to underwrite FY23 and the expectation going into FY24 is low (consensus expects FY24 to be a year of negative growth). Given the current momentum, we could see a much better than expected FY23 with positive commentary going into FY24, which could cause consensus to revise their FY24 numbers.
1Q23 results
Management announced 1Q23 EPS of $2.25, which was significantly higher than the consensus estimate of $1.81. TP&O revenue increased 32% to $8.1 billion, which is $200 million more than expected, and gross margin increased 590 basis points to 19.3%, which is ~2.5ppts higher than consensus expectations. Volume wise, truck deliveries around the world increased by 19% in 1Q23, reaching 51,100 units.
Growth is in the books
Seeing as how the order books are pretty much full for the rest of FY23, I think there is good visibility for the numbers. Also the data point that PCAR’s global shipments are expected to rise to between 51,000 and 54,000 in 2Q23, further supports FY23 revenue visibility. Despite the fact that 2024 order books are still closed, management has reported that early conversations with dealers indicate high demand for products well into the new year. This further supports my belief that FY24 is going to be better than what consensus expected. It is also helpful to hear management’s optimistic outlook on moderate growth in each region and sturdy freight tonnage has led them to raise FY23 industry forecasts for sales of Class 8 trucks in the United States and Canada and registrations of trucks with a capacity of more than 16 tons in Europe. Specifically, I believe that the end demand commentary is highly supportive of FY23 numbers. Management reports robust demand across the board, with the slight slowdown in truckload markets being more than counterbalanced by the robustness in vocational markets. However, registrations for vehicles weighing over 16 tons in South America were lowered due to caution from customers and dealers regarding the high interest rates in the region. Nevertheless, I believe the strong production rates and Brazil’s shift from EU5 to EU6 emissions standards are positive factors that will contribute to an overall optimistic outlook for South America.
Margin
In light of the 1Q23 TP&O gross margin coming in at 19.3%, higher than expected, management is now anticipating 2Q23 TP&O gross margin guidance in the range of 18% to 19%. I anticipate that the gross margin for the second quarter of 2023 will meet expectations, and there is a chance that the gross margin for the third and fourth quarters will also perform well. This is because management has stated that there will be no negative impact from price or cost changes on the sequential gross margin performance compared to the first quarter. Still, the new forecast does imply a slight slowdown from the 19.3% in 1Q, and that, I believe, is due to some level of continued supply chain headwinds. Nonetheless, I take heart from management’s comments that they anticipate supply chain headwinds to diminish over the course of the year. As a result of all these factors, I believe that the FY23 consensus estimates and FY23 valuation will be supported by the fact that the combination of higher pricing and cost deflation will continue to benefit margin.
PCAR Financial
Finally, it is my belief that the financial services segment has the potential to provide further support to the financial results in FY23. Although there are concerns about the impact of banking instability on PCAR, I am optimistic based on the better-than-expected performance relative to consensus. Furthermore, management has indicated that they have not encountered any difficulties with customers securing financing from medium-sized banks. Additionally, the 13 used truck facilities have contributed to improved pricing even as used truck prices have declined. With the portfolio expected to continue growing and improving throughout the year, management anticipates ongoing success for the segment, reinforcing my view that FY23 is likely to be a favorable year.
Conclusion
In conclusion, 1Q23 results were exceptional, with the company beating consensus estimates and reporting impressive growth in revenue and gross margin. With the order books pretty much full for the rest of FY23 and early conversations with dealers indicating high demand for products well into FY24, there is good visibility for the company’s growth. Although there are some continued supply chain headwinds, the combination of higher pricing and cost deflation is expected to continue benefiting margins. Finally, the financial services segment has the potential to provide further support to the financial results in FY23.
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