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PCAR is up 38% since March – is it still a good buy?

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Industrial stocks were among some of the big movers as the broad market rallied from its March, bear-market low point. A lot of that momentum seemed to be driven by hope that COVID-19 induced shutdowns would not only be temporary, but also that their net impact would also be short-lived. The market still seems to be looking for something to hang its optimistic hat on – some critical piece of data that can assure investors that as the economy is reopened, we will in fact be able to thread the needle successfully to restart economic activity while managing coronavirus infections and treating those who are inflicted.

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I think it’s important to understand that in the absence of anti-viral treatments of coronavirus symptoms, much less an actual vaccine, infections aren’t likely to decrease. I think what lawmakers, healthcare professionals and economists are hoping for is to avoid a major spike in new infections, a deadly secondary wave that overwhelms the system anew and forces another, perhaps even more catastrophic global shutdown.

This is a delicate balance, and it isn’t a given that we’re going to be able to pull it off. Unemployment numbers continue to increase, which means more and more people are losing their jobs, without guarantees they’ll be able to return to the same job later on. I think there is a big risk that we’ll see small businesses struggle to reopen at all – and keep in mind that small business provides the bulk of the jobs that make up the American workforce.

As an investor, I think that means there is going to continue to a clear delineation between where the best investing opportunities lie. I’ve seen reports indicating that the largest, most established companies have seen the lion’s share of the market’s rally since mid-March, and that jives pretty closely with what I’ve observed as well. Companies with the girth, and the balance sheets to ride through turbulent economic times are continue to provide the best probabilities of success. That’s one of the reasons i continue to like to rely on the fundamental and value-driven principles that my core investing system is built on. It doesn’t mean there aren’t opportunities in lesser-known names; but it forces me to scrutinize the details of those companies very carefully to determine if they have the resources necessary to manage uncertainty and come out on the other side.

One of the reasons the Industrial segment is interesting is because as economic activity picks up, there should generally be an increase in demand for many of the companies in this space. A healthy real estate market, for example – and there are indications that real estate has survived remarkably well so far in spite of other pressures – means that home builders can keep new projects going, which usually is good news for Machinery stocks like Paccar Inc. (PCAR). Real estate is hardly the only place PCAR operates, of course; it is really one example where better-than-expected strength should give this company’s business a lift.

That hope is part of the reason that PCAR has followed the Industrial sector’s move higher. From a March bottom at around $49, the stock has rallied by about 38% to its current at around $67. It is also starting to establish a consolidation base that marks a potential turning point for the stock, and which could offer some interesting opportunities to work with the stock on a short-term basis. The company’s balance sheet so far is holding up well, which is also a positive. Does the stock offer a third compelling reason to work with it on a long-term basis by also offering a compelling value proposition? Let’s find out.

Fundamental and Value Profile

PACCAR Inc (PACCAR) is a technology company. The Company’s segments include Truck, Parts and Financial Services. The Truck segment includes the design, manufacture and distribution of light-, medium- and heavy-duty commercial trucks. The Company’s trucks are marketed under the Kenworth, Peterbilt and DAF nameplates. It also manufactures engines, primarily for use in the Company’s trucks, at its facilities in Columbus, Mississippi; Eindhoven, the Netherlands, and Ponta Grossa, Brazil. The Parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles. The Financial Services segment includes finance and leasing products and services provided to customers and dealers. Its Other business includes the manufacturing and marketing of industrial winches. The Company operates in Australia and Brazil and sells trucks and parts to customers in Asia, Africa, Middle East and South America. PCAR has a current market cap of about $23.5 billion.

Earnings and Sales Growth: Over the last twelve months, earnings have declined a little more than -43%, while revenues dropped about -20.44%. In the last quarter, earnings were -32.6%, while revenues dropped -15.6%. The company’s margin profile is solid, but has shown some deterioration in the last quarter; over the last twelve months, Net Income was 8.27% of Revenues, sliding a bit to 6.96% in the last quarter.

Free Cash Flow: PCAR’s free cash flow is healthy at about $1.72 billion over the last year. That translates to a useful Free Cash Flow Yield of 6.12%. It has also increased from about $1.5 billion since the middle of 2019 and $1.63 billion at the end of last year.

Debt/Equity: The company’s Debt/Equity ratio is .75, reflecting a conservative approach to leverage. PCAR’s balance sheet shows $4.4 billion in cash and liquid assets in the last quarter versus about $7.2 billion in long-term debt. The company’s generally healthy operating profile, along with a solid cash position means that the company has good liquidity and should have no problems servicing the debt they have.

Dividend: PCAR’s annual divided is $1.28 per share and translates to a yield of about 1.88% at the stock’s current price. The dividend also appears safe, running at less than 25% of PCAR’s earnings per share.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $69 per share. That means the stock is fairly valued, running just 2% below that fair value target price. That also puts PCAR’s value price down at around $55 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above shows the last year of price activity for PCAR. From a peak in December at around $83.50, the stock declined sharply to a March low at around $49 per share before rebounding back up to e about $70 in late April. From that point, the stock has hovered in a mostly sideways range, with resistance at $70 and support around $66. A push above $70 should give the stock room to run to about $75 in the near term; but the stock also currently dropping back toward support. A drop below $66 could see additional downside to abut $62 per share.

Near-term Keys: For the most part, I really like PCAR’s fundamentals. Their balance sheet is healthy, but at the current price, it does not represent a value or any kind of bargain. That doesn’t mean there isn’t upside for growth-oriented investors to be had; only that it is already trading at valuations that are less attractive for bargain hunters. It also means that the best possibilities lie on the short-term side, via momentum-based trades. A break above resistance at $70 could offer an interesting opportunity to buy the stock or work with call options, with an eye on $75 as a useful profit target. If the stock drops below $66, consider shorting the stock or buying put options, using $62 as a practical exit target on a bearish trade.

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