Smart Investing


May 4, 2012


Test-driving investments in truck manufacturers

I’m already reading many companies' first-quarter reports, and the news is good.

The CEO of one of the companies I was reading about was discussing the worldwide car and truck fleet, and he brought to light that the average car fleet age is 10.6 years, when 10 years ago it was 9.4 years. This tells me more people will be buying new cars in the future.

For the first quarter, the "run rate" was 14.5 million cars. It is also important to note that while sales are up, incentives are down around 15 percent from last year. Inventories are an important item that I watch all the time, and for autos the historic norm is 60 to 65 days. For March, the inventory was only 57 days.

China is forecasting a growth rate on autos of 8 percent in 2012.

This good news is not just for autos, but trucks as well. Truck production is up 65 percent over last year from 31,000 to the current level of 51,200. The backlog for demand is high at 121,000 trucks; growth in North America is estimated to be between 7-12 percent.

Don’t worry about Europe. Truck registrations are down only 2.5 percent — the estimated decline is only 3-8 percent. In other words, sales will be made. China is also seeing growth in trucks — last year, production was 823,000, and this year the estimate has risen to 911,000 trucks.

So does it make sense to invest in a car or truck company? Let’s look at PACCAR Inc. (Nasdaq: PCAR) as an example. This company is known for its light- to heavy-duty trucks under names like Kenworth, Peterbuilt and DAF. The Bellevue, Wash., company employs about 23,000 employees and has been around since 1905. The company has a market cap of $15 billion.

The company PE is reasonable at 13.2, yet for some reason I can’t understand why the auto and truck manufacturing industry has a PE of only 3.4 for the last 12 months. Price-to-sales also favors the industry at 0.34, compared to PACCAR at 0.86. Price-to-tangible book value does look better for the company at 2.7 versus the industry average at 5.9. Price-to-cash flow goes back to favoring the industry average at 5.3 compared to 8.0 for the company. Investors will receive nearly a 2 percent dividend, 1.86 percent depending on the stock price, and the company only uses 41 percent of its earnings to pay out that decent dividend.

PACCAR has done a great job growing its sales, which jumped 57.31 percent for the last 12 months year over year as reported for the quarter ended March 31. The industry average could only produce sales growth of 8.6 percent for the same time period.

I was impressed with the 104.8 percent growth rate on earnings per share year over year for the last 12 months for PACCAR. The industry did beat that number, with earnings-per-share growth year over year for the last 12 months of 132.4 percent. Return on equity for the last 12 months has been 20.7 percent, which is very good, but again the industry average has me stumped on why the average is 58 percent.

The strength of PACCAR's balance sheet is evidence of its low debt to equity of 2.6 percent, especially in a high-debt industry where the average debt to equity is 203 percent. Liquidity looks good for both the company and the industry, with the industry slightly better at 1.3 compared to 1.2. This is like driving a car at 55 mph or 58 mph — you really can’t tell the difference.

While the industry average has some better numbers on some of the items, the efficiency of PACCAR is better than the industry. Over the last 12 months, the company turned over its receivables 4.3 times — nearly 35 percent higher than the industry turnover rate of 3.2 times. Inventory turnover also looked good for PACCAR at 21 times for the last 12 months; the industry could only manage a turnover rate of 11.2.

The analysts have been increasing their earnings-per-share estimate over the last 90 days for the year ending December 2013, from $3.95 to the current $4.05. The $4.05 is also a nice gain of 14.4 percent from the $3.54 for the year ending December 2012. Using a reasonable multiple of 15 times forward earnings, investors could be looking at a stock price around $60 per share come December 2013. The company also has a good PEG ratio of only 0.90, well below my requirement of 1.50.

Have a question or a company you'd like me to take a look at? Email me at

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


May 4, 2012