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.
One of the things that the the last year has made very clear, at least from an economic perspective, 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, no matter what talking heads and growth-oriented investors would have you believe, 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 this year. The truth is that every sector of the economy has had to find ways to adjust to current conditions – and that is often where the difference between “wonderful” and “fair” lies.
I believe that there is going to continue to be a clear delineation between where the best investing opportunities lie throughout 2021. Everybody is tired of hearing about the pandemic, and the restrictions and limitations it has imposed on every aspect of life; but the truth is that even as the pace of vaccine administration increases, there is still going to be plenty of uncertainty and risk. Unemployment remains high, with recent trends pointing upward enough to increase the likelihood of yet another round of stimulus from Congress to attempt to alleviate the pressure on American families and small businesses. 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 over the past 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 not only survived, but in many parts of country, thrived – 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 the past year. From a March 2020 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 before dropping back to about $82.50 at the end of the year. From that point, bullish momentum picked up again and pushed the stock to a new yearly high at around $103, with the stock now trading just a little above the $100 threshold. The company’s balance sheet has shown remarkable strength this year, even as Revenues and Net Income have fallen over the past twelve months. Does the stock offer a third compelling reason to work with it on a long-term basis by also offering a compelling bargain 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 $34.6 billion.
Earnings and Sales Growth: Over the last twelve months, earnings have declined about -23.5%, while revenues dropped about -9%. In the last quarter, earnings improved by 5.41%, while revenues grew almost 13%. The company’s margin profile is solid; over the last twelve months, Net Income was 6.93% of Revenues, and strengthened slightly to 7.29% in the last quarter. I call those numbers “solid” because this measurement has stayed consistently in the 7% range throughout the past year.
Free Cash Flow: PCAR’s free cash flow is healthy, at about $1.97 billion over the last year. That translates to a useful Free Cash Flow Yield of 5.71%. It has also increased from about $1.8 billion in mid-2020, and $1.71 billion at the start of last year.
Debt/Equity: The company’s Debt/Equity ratio is 0, reflecting the fact that the company liquidated approximately $10.4 billion in long-term at the end of the third quarter of 2020. PCAR’s balance sheet shows $4.8 in cash and liquid assets in the last quarter (up from $3.3 billion at the start of 2020). Their strong cash position gives the excellent liquidity and the financial capacity to keep managing their business during difficult times while being in a position to take advantage of new, useful opportunities as they emerge.
Dividend: PCAR’s annual divided is $1.28 per share and translates to a yield of about 1.29% 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 $89.50 per share. That means the stock is overvalued by about -11%. That also puts PCAR’s value price down at around $71.50 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 $103 in January. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock dropped off of that high to find support at around $91 at the start of February, rebounding strongly from that low to its current level at around $100. That puts immediate resistance at that 52-week high, with expected support at around $95 based on pivot activity in that price area in November. If the stock can push above $103, it could surge to about $111 based on the distance between its last resistance break (at $95) to its $103 high. A drop below $95, on the other hand should find next support at around $91 where the last pivot low occurred.
Near-term Keys: PCAR’s fundamentals are very solid, and in fact have improved in the last quarter. Their balance sheet is one of the strongest in the industry, but at the current price, the stock 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 $103 could offer an interesting opportunity to buy the stock or work with call options, with an eye on $111 as a useful, near-term profit target. If the stock drops below $95, consider shorting the stock or buying put options, using $91 as a practical exit target on a bearish trade.