Time For Paccar’s Drive Higher To Slow?

After more than an 80% rise from its March lows of this year, at the current price near $90 per share, we believe Paccar’s stock (NASDAQ: PCAR) is overvalued. Paccar, one of the largest manufacturers of medium- and heavy-duty trucks in the world, saw its stock increase from $50 to $90 since March 23rd compared to the S&P 500 which increased almost 56% from its recent lows. The stock has outperformed the market and was at a 52-week high recently. The stock seems to be poised to fall as the rise in price has been despite a high decline in revenue in Q2 2020 (down by 53% y-o-y). Earnings for Q2 2020 also fell to $0.43 (down by 76% y-o-y).

Our dashboard What Factors Drove 33% Change In Paccar Stock Between 2017 And Now? provides the key numbers behind our thinking.

The 30% rise in PCAR stock price between FY 2017 to FY 2019 is justified by the growth in earnings during those two years. Paccar’s Revenue increased 32% from $19.5 billion in 2017 to $25.6 billion in 2020. This effect was amplified by margins increasing from 8.6% to 9.3% during this period. On a per share basis, earnings went up from $4.76 to $6.88. Higher revenue and margins were driven by an increase in Truck deliveries primarily in US and Canada.

During the same period, the P/E multiple declined from 14x to 11x. This was because the rise in stock price was lower than the growth in EPS. While the company’s P/E is now 13x there is a downside risk when the current P/E is compared to levels seen in the past years. P/E of 11x end of 2019 and 9x as recently as late 2018.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. With the majority of people working from home, the demand for Paccar’s trucks has drastically reduced. The company saw truck deliveries decline to 18.1K, down by 65% y-o-y in Q2 2020. For the second quarter revenue was recorded at $3.1 billion, down by 53% y-o-y.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

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