Bakar (NASDAQ: Scar) Earnings were strong in the fourth quarter. But more importantly, what also came out strong for the company in its earnings call and investor conference call was its outlook for the truck market in 2019.
Here are some highlights from the manufacturer of Peterbilt, Kenworth and DAF vehicles:
– North American Class 8 truck retail sales last year were 285,000 units, up 30 percent from the year before, according to Preston Veget. PACCAR is forecasting 285,000 to 315,000 trucks for 2019. A report by Russ Gilardi at Bank of America Merrill Lynch, released after the earnings report but before the earnings call, said PACCAR’s previous North American sales forecast was 5,000 units lower than that at both the low and high estimates. European sales in 2018 for trucks over 16 metric tons were 319,000. That’s close to the high end of PACCAR’s European forecast for 2019, which is between 290,000 and 320,000 and was unchanged.
– PACCAR delivered 50,400 trucks in the fourth quarter, up 6% from the third quarter. That’s a global number, and PACCAR said its European numbers were boosted by increased build days in Europe. But PACCAR also pointed to better supplier performance, a problem that has plagued original equipment manufacturers (OEMs) for much of 2018. The company’s CEO, Ronald Armstrong, said on the conference call that supplier performance in January was “the best we’ve seen in a few quarters,” according to a transcript of the earnings call provided by SeekingAlpha. “They’ve got their legs under them, so we’re working closely with them so that we can support the build progress that we want to achieve in 2019,” he said.
– During the year, PACCAR delivered 189,100 vehicles, a record. Its market share for DAF products in Europe was 16.6%, compared to 15.7% in the previous year, which the company said was also a record.
– With various reports continuing throughout 2018 of staggering Class 8 order book numbers, the question arose of how long this could continue. Armstrong said he still saw strength in the order book. Class 8 orders last year were “very normal… not normal.” Armstrong said dealers in the PACCAR network are confident in their ability to deliver this backlog, “and very confident that the orders will continue to fill the slots that are there.” He said PACCAR was taking orders for 2020, and industry conditions are “very positive.” Harry Scheepers, the company’s chief financial officer, said the cancellations from the order book were mostly cancellations that led to reorders, “so the dealer changes the type or the customer changes the truck, but not any major cancellations yet.”
– Sales orders in Europe are also very strong. Armstrong said the order book in Europe as a whole has exceeded 300,000 orders for three years in a row and could exceed that again in 2019. “So we’re starting the year in a really positive mood with where we’ve been,” he added.
– According to Michael Barclay, the company’s controller, cost inflation is not outpacing vehicle inflation. Vehicle prices rose about 2 percent in the fourth quarter compared to the second and third quarters. Barclay said costs rose about 1.6 percent, “so we had some positive price recognition during the quarter.” PACCAR says it is confident that pricing will hold. As Armstrong said, the company’s orders are “very good” for 2019, “so we know what pricing is going to be.” With that pricing, PACCAR expects its margin to be about 14.5 percent in the first quarter and remain in the 14 to 15 percent range for the year.
– In terms of financial performance, quarterly net sales and revenue were a record $6.28 billion. Net income was $578.1 million for the quarter, also a record. The company’s earnings per share were $1.61, above the consensus of $1.53, but much of that was because PACCAR beat expectations from its financial services and investment income division. Merrill Lynch said PACCAR’s gross margin of 14.2 percent was up 50 basis points year over year but below management’s previous 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 prices on new trucks,” Gilardi wrote. (As we noted, management had forecast 15 percent margin this year but only 14 percent.)
– Merrill Lynch maintained its neutral stance on Paccar with a target price of $63 per share. It is trading near $64 now but that’s after a $3.54 gain on Tuesday, the day of the earnings release, to $64.84. In its report, Merrill Lynch said Paccar’s upside potential includes “a faster-than-expected recovery in used truck prices,” and other expected events: M&A activity, a better European economy and improved margins. Downside risks are macroeconomic — a global trade war — or more specific issues, such as continued and worsening driver pressure that could lead to order delays.
