Summary
Given the risks inherent in the Hours-of-Service (HOS) regulations, the Euro 6 pre-buy and higher a share price relative to our fair value range, we do not expect PCAR to continue to outperform in 2H 2013. PCAR is one of the best large U.S. industrial franchises and we would like to re-enter lower. The HOS regulations and Euro 6 emissions standards may yet let us do so.
Key Items
Euro 6 Pre-buy: To us, PCAR’s quarter looked fairly dependent on the Euro 6 pre-buy. The effect of Euro 6 is hard to estimate - even though it was downplayed on the call. Sales in Europe would probably not have been up (while those in the US and Canada were down) without it. That pre-buy will probably reverse in 2014, with orders leading by year-end.
Industry Not Great Into HOS: As we have written before, the industry backlog to build ratio (and other metrics) are not all that strong into the new HOS regulations. These regulations will almost certainly exacerbate the driver shortage and negatively impact truck sales.
PCAR Strategy: We would look to exit PCAR around here (it’s at the high end of our base case valuation range less special dividend, for example). We suspect that Europe orders will look weak into 2014 with Euro 6 pending. We also suspect that 2H 2013 US orders will look weak post hours-of-service. We do not think that investors are compensated valuation-wise for taking those risks at current levels. If PCAR gets clobbered on HOS, Euro 6 and other worries, we would very much like to re-enter. There are a number of positive drivers for PCAR, as we outlined in our Truck OEM black book last August, including a very old North American fleet, parts sales on the MX engines and some returns on investments in Brazil. But the shares have outperformed significantly since that presentation, leaving the risk/reward trade-off less attractive. We are looking to buy a big dip, if we get it. If not, there are other fish.
