Paccar Steps on the Gas

Paccar's (NAS: PCAR) trucks are all geared up. Crossing speed bumps (read: economic uncertainties), the company came up with a stellar fourth quarter, and has what it needs to stay revved up. Here's why...

The older the trucks, the better
Considered a key bellwether for economic activity, trucking accounts for nearly 67% of the total freight tonnage carried in the United States. According to the American Trucking Association, truck tonnage grew by 5.9% in 2011-- the highest such growth in 13 years. Solid manufacturing output along with inventory restocking by retailers were the key driving factors. The fleet is aging fast, though, and this is good for Paccar.

With freight rate and tonnage rising, Paccar's customers are finding it easier to replace their aging vehicles. This was a key factor that helped drive Paccar's fourth-quarter revenue to a historical quarterly high of $4.85 billion, up a staggering 58% from the comparable period last year.

Aging vehicles also need more repairs and maintenance. With the average age of vehicles rising, owners will need new parts to keep them in running condition, which would mean higher aftermarket sales for Paccar.

Tapping the growing opportunities
The company is also making big investments in rapidly growing emerging markets, which should support the ongoing trucking revival in the U.S. as well. Just last month, it began construction on its $200 million heavy-duty DAF trucks facility in Brazil. It may even launch DAF trucks in India, where it already has a good presence. The company also expanded its Shanghai office and established a new one in Moscow last year. The markets outside the U.S. and Europe account for nearly a quarter of Paccar's revenue, and I won't be surprised if this proportion goes up substantially in a couple of years.

A manageable challenge
Despite a sluggish European market, Paccar's DAF unit (which is a big truck producer in Europe) achieved a record 15.5% market share in the 15-tonne truck market last year. Paccar currently derives nearly one-third of its revenue from Europe. DAF has cautiously reduced its production by nearly 20%, but the company is expecting a rise in orders from the region as the year progresses.

The Foolish bottom line
Besides expanding revenue, Paccar is also maintaining a tight grip on its expenses. In the fourth quarter, its operating margin improved to 9.6% from 8.6% in the same quarter last year. Paccar is also reducing its dependence on Cummins (NYS: CMI) for engines as it has started manufacturing its own engines, and is now selling almost 25% to 30% of them in a month.

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At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Cummins and Paccar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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