PACCAR’s Got A Front Seat To Profitability

PACCAR Inc.: A Compelling Long-Term Investment Opportunity

1. Introduction and Overview of PACCAR as a Long-Term Investment

In the dynamic and often noisy world of financial markets, identifying a resilient and undervalued investment opportunity is akin to finding a steady performer amidst the chaos. PACCAR Inc. (PCAR) emerges as such a gem, offering a robust narrative of growth, stability, and strategic alignment with shareholder interests. Since its recommendation as a Long Idea in July 2020, PCAR has outperformed the S&P 500 by 9%, showcasing a 95% gain against the index’s 85%. This performance underscores PCAR’s potential as a long-term investment, bolstered by its diversified business model, industry leadership, and commitment to corporate governance. The company’s valuation suggests a 10% decline in profits, presenting a significant margin of safety and an attractive risk-reward profile for investors.

2. Industry Leadership and the Importance of Trucking

Trucking stands as the backbone of the U.S. economy, accounting for 72% of freight movement in 2024. PACCAR, a leading manufacturer of medium and heavy-duty trucks, is strategically positioned to benefit from this dominance. The trucking industry’s projections indicate growth from $906 billion in revenues to $1.5 trillion by 2035, with trucking’s market share expected to rise to 77%. PACCAR’s history of increasing production, from 155,000 trucks in 2015 to 185,000 in 2024, aligns it with this upward trend, poised to capitalize on the industry’s tailwinds. The company’s resilience through economic cycles, marked by consistent profitability, further solidifies its leadership in the sector.

3. Profitability and Growth Drivers

PACCAR’s success is driven by multiple growth engines. The company has significantly enhanced its profitability per truck, with NOPAT per unit rising from $10,270 in 2015 to $22,791 in the trailing twelve months (TTM). The aftermarket parts segment, contributing 20% of revenue, has seen remarkable growth, with record sales of $6.7 billion and pretax profits of $1.7 billion in 2024. This growth is fueled by an expanding global presence and a network of TRP locations, which has grown from 76 in 2016 to 353 in 2024. Additionally, PACCAR’s revenue and margins have steadily improved over two decades, with NOPAT margins rising from 8% in 2013 to 13% in TTM, underscoring operational efficiency and strategic pricing.

4. Corporate Governance and Shareholder Returns

PACCAR’s commitment to aligning executive compensation with shareholder interests is a standout feature. The company’s emphasis on ROIC as a key performance metric ensures that management decisions are focused on enhancing profitability and efficiency. Executive compensation, including equity and cash incentives, is tied to metrics such as ROIC, net income, and return on sales relative to peers. This alignment fosters a culture of accountability and long-term value creation. PACCAR’s strong free cash flow, amounting to $13.8 billion since 2018, and its consistent dividend growth, with a 1.2% yield and potential for special dividends, further highlight its commitment to shareholder returns. The company’s approach to capital allocation, including share repurchases, demonstrates prudent financial management.

5. Challenges and Market Expectations

Despite its strong fundamentals, PACCAR faces potential headwinds, including a forecasted slowdown in truck sales in 2025 for the >16 tonnage category in the U.S., Canada, and Europe. ACT Research points to slower freight growth due to stabilized inventory levels and consumption patterns. However, PACCAR’s historical resilience, with no negative NOPAT since 1998 and only two instances of negative FCF in 2001 and 2008, underscores its ability to navigate cyclical downturns. The current stock price reflects these challenges, offering an attractive entry point for long-term investors. The market’s expectation of a 10% NOPAT decline appears overly pessimistic, given PACCAR’s track record of 11% and 13% compounded annual growth over 20 and 10 years, respectively.

6. Valuation Analysis and Conclusion

PACCAR’s undervaluation is evident, with a price-to-economic book value (PEBV) ratio of 0.9, implying a 10% NOPAT decline. A reverse DCF model highlights significant upside potential. Assuming NOPAT margin falls to 11% and revenue grows at consensus estimates, PCAR’s stock could reach $145 per share, a 34% increase from current levels. Given PACCAR’s historical growth and profitability, coupled with a strong financial position and alignment with shareholder interests, the company presents a compelling case for long-term investors. The integration of a resilient business model, strategic growth drivers, and a commitment to value creation positions PACCAR as a standout investment opportunity in the current market landscape.

In conclusion, PACCAR Inc. offers a unique blend of stability, growth potential, and alignment with shareholder interests, making it a strategic addition to any long-term investment portfolio.