Tuesday, March 10, 2009

From The Mailbag: PCAR

PACCAR (PCAR) designs and manufactures a wide range of trucks used for commercial transportation. Comparing operating metrics to its competition, it appears to be a well-run company. Furthermore, the company's most recent quarterly results suggest that management anticipated a drop in demand relatively well, as it cut costs and thus managed to stay profitable despite a difficult environment. 

The company trades with a P/E of just 8, but is cautiously optimistic going forward: fuel costs, a major component of its customers' operating costs, have dropped dramatically. As such, the company has noticed that many of its customers are in positions of financial strength (as compared to previous quarters) and as such are willing to invest, despite the negative economic climate.

There are, however, financial risks associated with this company. As part of its operating model, the company finances dealers and various wholesale buyers, and it borrows money to do so. Therefore, even if management does an outstanding job designing and building top-notch next generation vehicles, a poorly run company that has received a loan from PCAR can have a material adverse impact on PCAR. 

Exacerbating this issue is the fact that PCAR has over $7 billion in debt, and the vast majority ($5.5 billion) is due this year. The company has earned just over $1 billion per year over the last several years, and so it will have to rely on outside financing. While the company's current debtors may find nothing wrong with renewing PCAR's borrowings, investors should be aware that the risk exists nevertheless: if debtors don't have confidence in PCAR's finance receivables (i.e. the loans PCAR has offered to its dealers and customers), the consequences are large. As such, for those value investors who prefer only making the safest of investments, PCAR's model of offering loans to its customers adds an element of risk best to be avoided.

1 comment:

PlanMaestro said...

I also heard from people in the industry that PCAR is loosing share to International and has not shown signs of improvement.

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