As a value-focused investor, I’ve read a lot of books and studied the methods of a lot of well-known money managers who have found success using the same reliance on finding bargains in any market. One of the most successful in the entire history of the U.S. stock market, and arguably the most famous of our era is Warren Buffett. His annual reports for Berkshire Hathaway have long been considered required reading for any serious fundamental or value-oriented investor because of the way he outlines his views of current conditions and where he is finding useful opportunities to keep his capital working for him.
Snippets and quotes from Buffett’s writings and interviews can be found just about anywhere, but one of the most pertinent to a value-oriented investment approach is, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” That concept is something that has reinforced my approach to both fundamental and value analysis over the years and helped me refine my own system to what it is today.
2020 has been an interesting year in a lot of respects, but for value analysis, one of the things that it has made very clear is the difference between “fair” companies and “wonderful” ones. It isn’t as simple as looking at the way a stock’s price has moved, of course, and it isn’t about finding companies that have been shielded from the effects of the pandemic that is going to keep pressure on economic growth and stability into 2021. The truth is that every sector of the economy has had to find ways to adjust to current conditions – and this year, that is often where the difference between “wonderful” and “fair” lies.
I believe that there is going to continue to a clear delineation between where the best investing opportunities lie well into next year. Companies with the girth, and the balance sheets to ride through turbulent economic times remain the most likely to provide the best probabilities of success. That’s one of the reasons i continue 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 sectors that has been really interesting to watch this year is the Industrial sector. This segment is interesting 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 and construction is hardly the only place PCAR operates, of course; it is really just 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 for most of the year. From a March bottom at around $49, the stock nearly doubled in price by early August, hitting a peak at around $91 per share before falling back to a short-term low around $81. The stock rallied again through October, hitting a new 52-week high at nearly $96 earlier this month before falling back a bit to its current price. The company’s balance sheet has shown remarkable strength this year. Does the stock offer a third compelling reason to work with it on a long-term basis by also offering a compelling value proposition, or has the stock’s rally pushed it past the point of useful value? 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 $31.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings have declined about -36.5%, while revenues dropped about -22.5%. In the last quarter, earnings improved by 158%, while revenues grew a little over 61%. The company’s margin profile is solid; over the last twelve months, Net Income was 7.39% of Revenues, and strengthened slightly to 7.81% in the last quarter.
Free Cash Flow: PCAR’s free cash flow is healthy, at about $2.1 billion over the last year. That translates to a useful Free Cash Flow Yield of 6.79%. It has also increased from about $1.8 billion in the last quarter, and $1.63 billion at the end of last year.
Debt/Equity: The company’s Debt/Equity ratio is .76, reflecting a conservative approach to leverage. PCAR’s balance sheet shows $4.53 in cash and liquid assets in the last quarter (up from $4.275 billion in the last quarter) versus about $7.7 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 1.44% at the stock’s current price. The dividend also appears safe, running at about 30% 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 $91 per share. That means the stock is fairly valued, running just 1% below that fair value target price. That also puts PCAR’s value price down at around $72.50 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. The red diagonal line traces the stock’s upward trend from March to its peak at around $96 earlier this month. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From a peak in December 2019 at around $83.50, the stock declined sharply to a March low at around $49 per share before rallying to its August peak, then paused into mid-September before pushing to its peak this month. It has dropped off of that point, marking immediate resistance at $92 and support at around $88. A drop below $88 could see the stock fall to about $85, with $81 below that offering next support. A bounce off of current support at $88 A push above immediate resistance around $92 should give the stock enough momentum to retest its $96 high.
Near-term Keys: PCAR’s fundamentals are very solid, and in fact have improved in the last quarter. 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 $92 could offer an interesting opportunity to buy the stock or work with call options, with an eye on $96 as a useful, near-term profit target. If the stock drops below $88, consider shorting the stock or buying put options, using $85 as a practical exit target on a bearish trade.