We downgrade our recommendation on PACCAR Inc. (PCAR) to Neutral from Outperform. Headquartered in Bellevue, Washington, PACCAR is the third largest manufacturer of heavy-duty trucks (with a capacity of more than 15 metric tons) in the world after Volvo and Daimler, and has substantial manufacturing exposure to the light/medium trucks (with a capacity of 6–15 metric tons) market.
During the first quarter of 2011, PACCAR posted strong results. The company reported almost a threefold increase in profit to $193.3 million or 53 cents per share in the first quarter of 2011 from $68.3 million or 19 cents per share in the same quarter of 2010. Net sales and Financial Services revenues surged 47% to $3.28 billion. The rise in sales and profit was attributable to strong truck sales in Europe and North America and an improvement in financial services profit and parts revenues globally.
However, the downgrade is based on the expectations regarding the company’s performance in the near future. PACCAR’s long-term debt increased to $6.24 billion as of March 31, 2011 from $6.09 billion as of December 31, 2010. As a result, debt-to-capital ratio deteriorated to 9% as of March 31, 2011 from 2.7% as of December 31, 2010.
Secondly, attaining profits from the Financial Services segment are difficult as the segment is highly exposed to lower margin and truck repossessions. Here the company has to compete with banks, other commercial finance companies and financial services firms, which may have lower costs of borrowing and higher leverage or market share goals. This could lead to decreased margins, lower market share, or both.
Thirdly, PACCAR faces tough competition from its peers in Class 8 truck markets. Previously, there were three principal competitors in the U.S. and Canada Class 8 truck market. In Europe there were five other principal competitors in the commercial vehicle market in 2010, including parent companies to two competitors of the company in the U.S.
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