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Takeaway: $PCAR: Production cuts come from weak orders months ago - no surprise. Trading on production is like driving with the rear-view mirror.

Truck Orders Lead Production Changes: 

Trading on production announcements is like driving with the rear-view mirror.

 

“This is evident in strong sales of aftermarket parts and services and excellent performance at PACCAR Financial Services. Industry orders for new trucks in North America have slowed in recent months as customers evaluate the mixed signals of a sluggish economic recovery,” – PCAR CEO Mark Pigott in 9/11/12 press release.

 

  • Orders Lead, Production Lags: PCAR increased the amount of production cuts in 3Q from 10% to 15%-20% vs. 2Q.  That should not be surprising because truck orders have been below build rates for the industry for months.  Production cuts of at least this size are the correct and necessary response.
  • Cuts All Around:  All four Class 8 manufacturers will cut NA production.  Navistar appears to be taking the most aggressive approach to capacity reductions.
  • NA Orders Below Replacement Demand:  Truck earnings are far from peak levels, unlike, say, mining equipment profits.  Buying cyclicals when orders have been weak and production is being cut is likely to work much better than buying them at peak profits when the outlook has never been better. 
  • Fleet Age Increases: Our thesis is that the NA Class 8 fleet will remain elevated and probably age further.  This is what the stock has historically correlated with – not margins or truck sales.  Yes, lower production will result in lower margins and if an investor follows that, they will get the stock wrong.  An aging fleet will drive higher parts revenue and more stable financial services returns.  PCAR specifically referenced those trends in the quote above. 
  • PCAR a Top Idea: Share losses by NAV, greatly reduced pre-buy activity and an aging fleet, in addition to other factors, position PCAR to be a top performer, in our view.  See our August 16th Black Book on truck OEMs for details.