Wait for Forward-Looking Data in the 10-K
- Mostly ‘Takes’ on Quarter: PCAR reported a quarter that initially reads quite well. However, the EPS beat was mostly due to a lower than expected tax rate (29.2% vs. the ~32.2% imbedded in consensus estimates).
- Capitalization Item: Another negative is a footnote below the income statement reading : “The fourth quarter 2012 includes the benefit of a $12.7 million reduction in cost of sales related to the capitalization of new product tooling that had been expensed in the first nine months of 2012. The positive effect on net income for the fourth quarter was $9.0 million ($0.03 per share)." It is difficult to know how to interpret this item and management should have expanded on it on the conference call, in our view. It could be viewed as PCAR slightly understating its profitability in the first nine-months. Or it could be viewed as 'goosing' the quarter. Regardless, the benefit was not in expectations and adds to the quarter's miss.
- A Miss, Adjusted: PCAR missed by a penny or two when the lower tax rate and capitalization items are backed out. The street 'hates' it when these items are not clearly presented, leaving the shares to get hit harder, in our view.
- Ignore the Quarter: PCAR has a lot of things going well for it in 2013-2014 and 4Q 2012 was already well known to have been weak for the truck OEMs globally. In the near-term, we estimate that Navistar has lost significant market share in orders through late 4Q. That should benefit PCAR, among others, in early 2013. Further, we see the end of tail pipe emissions regulations and a rebound in construction activity as significant potential benefits. In addition to a record-old Class 8 fleet, there are a number of reasons to expect PCAR to perform extremely well over the next couple of years, in our view. (See here for additional information on PCAR or ping us for more background).
- Industry Improving: The Class 8 market appears to have bottomed in late summer. With recent and anticipated production curtailments amid a rebound in orders, industry dynamics look to have improved heading into 2013.
- Ahead of Itself: We believe PCAR shares have room to run, but have been cautious on the rapid move in valuation ahead of fundamentals (see here for our recent note on PCAR valuation). For mature companies, increasing share prices usually mean increasing risk, in our view. A decline in PCAR shares to the mid-low 40s could provide an attractive entry opportunity for investors.
- Look Forward: In addition to the Volvo (2/6/13) and Daimler (2/7/13) earnings reports, we are interested to see the backlog data in the PCAR 10-K at the end of next month. Backlog data should give us a better sense of order trends and market share with respect to NAV, which we expect to be an important upside driver for PCAR. In our view of capital equipment, orders matter and sales usually don't. Trading on sales is like driving with a review mirror, while anticipating order trends is key.
Jay Van Sciver, CFA
Managing Director
HEDGEYE RISK MANAGEMENT
111 Whitney Avenue
New Haven, CT 06510