Idea Alert: Paccar - Our Top Industrials Idea
Levels:
TRADE support = 39.82
TREND support = 38.55
Class 8 Truck Cycle: For decades, Class 8 truck demand has been driven by the imposition of expensive safety and emissions regulations. However, the current round of regulations should actually decrease the total cost of ownership for commercial vehicles, aligning the interests of truck operators and regulators. This may eliminate the costly pre-buy cycles that have historically distorted underlying demand. More stable demand should result in higher OEM capacity utilization, an older fleet and more stable used truck prices. Those factors should contribute to higher margins and valuations.
Industry Structure: The Class 8 truck OEM industry is consolidated and has a history of profitability. Recent execution missteps at Navistar may allow Paccar to add market share.
Valuation: We see Paccar as the most attractively valued OEM offering exposure to the improved US truck pre-buy dynamics.
Trade & Trend: We expect the EPA to promulgate revised non-conformance penalties for Navistar within the next two to twelve weeks. If significantly more punitive, Navistar’s competitors could benefit significantly. Into 2013, we expect Navistar to struggle with its ICT+/SCR combined 13L engine in the market place. Further, we think that the incorporation of the Cummins 15L engine may take longer than expected. This may also benefit Paccar.
Tail: As industry capacity adjusts to a market without pre-buy activity, the OEMs may generate more stable profits. That should result in higher valuations.
Please see our August 16th Black Book and conference call for additional details.
