Buy The Dip In PACCAR, Says Longbow Research

PACCAR Inc PCAR is likely to benefit from higher North American volumes and continued improvement in used truck conditions that will drive higher sale and positively impact its profitability in Financial Services, according to Longbow Research.

The Analyst

Longbow analyst Faheem Sabeiha upgraded Paccar from Neutral to Buy and established an $85 price target. 

The Thesis

Strong Class 8 fundamentals and freight transportation analyst FTR Associates' higher production forecast for 2018 and 2019 made Longbow positive on Paccar, Sabeiha said in a Tuesday note. 

Although rising material costs could weigh on Paccar's margins, the impact will only be minimal: 15-20 cents per share, excluding offsets from cost-sharing in its LTAs and potentially higher list pricing in the second half of 2018, the analyst said. 

Longbow raised its 2018 earnings per share estimate by 15 cents to $5.37, citing a higher sales outlook. Longbow raised its 2019 estimate by 13 cents to $5.67 and lowered its 2020 estimate by 21 cents to $5.24 to account for a larger-than-projected decline in industry sales.

"Overall, we believe the recent pullback in PCAR represents a great entry point for a best-in-class operator that is well-positioned to capture rising end market demand and boasts a 10-percent FCF yield," Sabeiha said. 

The Price Action

Paccar shares were trading flat over the past year through Monday. 

The stock was up 1.6 percent at $69.91 at the close Tuesday.

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