Bank Of America Upgrades PACCAR To Buy, Labels It 'Best In Breed'

PACCAR Inc PCAR reported April Class 8 Orders of 166 units, the worst since August 2010. Bank of America Merrill Lynch’s Ross Gilardi upgraded the rating for the company from Neutral to Buy, while raising the price objective from $55 to $70. The analyst commented that the company’s Class 8 orders cannot get worse than the April level.

Earnings Bottoming Out

Analyst Ross Gilardi expressed confidence in the company’s trough EPS holding “comfortably in the $3.50-$4.00 range with peak EPS of greater than $5.00 per share in 2021.”

Gilardi expects the resilience of Parts, stable trends in EMEA, and eventual recovery of EM to enable PACCAR to hold $3.70 of trough EPS in 2017. This is similar to the EPS levels of Caterpillar Inc. CAT and Deere & Company DE, two $70-$80 per share stocks having far more uncertain outlooks.

As investors become confident of the Class 8 orders bottoming out, PACCAR’s shares are expected to rise to $70, the analyst added.

“We see peak EPS of $5.15 by 2021 on the back of a $4.50 peak in 2015 and a $4.00 peak in 2006. Remarkably, PCAR could earn $5.15 of EPS with Class 8 peaking at only 300k units in 2021 versus a $4.00 peak in 2006 with Class 8 peaking at 376k units (25% above the 2021 peak),” the Bank of America Merrill Lynch report noted.

PACCAR’s ability to continue gaining share in the US and Europe along with the expected contribution from its new Brazilian factory make these figures achievable, the analyst added. The company’s Parts business should also contribute an incremental $0.35 of EPS by 2021 versus the 2015 peak.

The EPS estimates for 2016 and 2017 have been raised by 4-6 percent to $3.80 and $3.70, respectively, to reflect better margins.