PACCAR (PCAR)

Trucking company PACCAR (NASDAQ:PCAR) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 16% year on year to $6.91 billion. Its non-GAAP profit of $1.46 per share was 7.5% below analysts’ consensus estimates.

Company Overview

Founded more than a century ago, PACCAR (NASDAQ:PCAR) designs and manufactures commercial trucks of various weights and sizes for the commercial trucking industry.

Heavy transportation equipment companies are investing in automated vehicles that increase efficiencies and connected machinery that collects actionable data. Some are also developing electric vehicles and mobility solutions to address customers’ concerns about carbon emissions, creating new sales opportunities. Additionally, they are increasingly offering automated equipment that increases efficiencies and connected machinery that collects actionable data. On the other hand, heavy transportation equipment companies are at the whim of economic cycles. Interest rates, for example, can greatly impact the construction and transport volumes that drive demand for these companies’ offerings.

Companies competing against PACCAR include Navistar International, (NYSE:NAV), Volvo (STO:VOLV-B), and Daimler Truck Holding (ETR:DAI).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, PACCAR grew its sales at a tepid 5.9% compounded annual growth rate. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about PACCAR.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. PACCAR’s recent performance shows its demand has slowed as its annualized revenue growth of 1.7% over the last two years was below its five-year trend. We also note many other Heavy Transportation Equipment businesses have faced declining sales because of cyclical headwinds. While PACCAR grew slower than we’d like, it did do better than its peers.

This quarter, PACCAR missed Wall Street’s estimates and reported a rather uninspiring 16% year-on-year revenue decline, generating $6.91 billion of revenue.

Looking ahead, sell-side analysts expect revenue to decline by 3.1% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and implies its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

PACCAR has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 12.5%.

Looking at the trend in its profitability, PACCAR’s operating margin rose by 5 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, PACCAR generated an operating profit margin of 12.7%, down 3.2 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

PACCAR’s EPS grew at a remarkable 11.8% compounded annual growth rate over the last five years, higher than its 5.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into PACCAR’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, PACCAR’s operating margin declined this quarter but expanded by 5 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For PACCAR, its two-year annual EPS growth of 1.7% was lower than its five-year trend. This wasn’t great, but at least the company was successful in other measures of financial health.

In Q1, PACCAR reported EPS at $1.46, down from $2.27 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects PACCAR’s full-year EPS of $7.09 to shrink by 16.2%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

PACCAR has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 10.7% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that PACCAR’s margin dropped by 3.6 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

PACCAR’s free cash flow clocked in at $745.2 million in Q1, equivalent to a 10.8% margin. The company’s cash profitability regressed as it was 4.7 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

PACCAR’s five-year average ROIC was 31.2%, placing it among the best industrials companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, PACCAR’s ROIC has increased significantly over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

PACCAR is a profitable, well-capitalized company with $8.1 billion of cash and no debt. This position is 16.8% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Both revenue and EPS missed. Overall, this was a weaker quarter. The stock traded down 6.7% to $85.85 immediately after reporting.

Updated: May 21, 2025 at 10:58 PM EDT

When considering an investment in PACCAR, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

PACCAR isn’t a terrible business, but it doesn’t pass our quality test. First off, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its projected EPS for the next year is lacking. On top of that, its cash profitability fell over the last five years.

PACCAR’s P/E ratio based on the next 12 months is 15.9x. At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $100.97 on the company (compared to the current share price of $94.01).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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