166,800 Paccar-badged vehicles were delivered during 2006, consolidated sales and revenues of $16.45 billion - up 17 per cent on 2005 – were accrued, resulting in a record post-tax profit of $1.496 billion. These are undoubtedly good figures,
But we would like to sound a cautionary note here. Paccar derives 52 per cent of its revenue from the North American market. There is near universal agreement that this is going to plummet during 2007. Think 40 per cent off.
There is less agreement about what happens next; the optimists predict an almost immediate bounce back to pre EPA 07 sales levels, driven by the advent of EPA 10 in 2010. As such, the market predictions posit a steep drop, followed by an almost immediate climb.
We are rather less sanguine. Yes, there will be a climb back, but we cannot see the NAFTA market achieving the levels witnessed during 2006 during 2008/9. Not only does the pre EPA 07 pre-buy seem to preclude this – so to does the likely direction of the US economy. What this says for a company with a 50 per cent exposure to the same is not necessarily what the shareholders might want to hear.
Despite its very nascent JV in Taiwan, Paccar’s coverage of Asia is only now beginning to take shape. We think it has left things rather late; forget China, what of India – that 15 per cent of Ashok Leyland is still on the table, and this would fit rather nicely within the Paccar family. The spread of risk within the Paccar business – which sees NAFTA and Europe accounting for 80 per cent of revenue - is one that we feel to be skewed. Yes, NAFTA and Europe are two of the major markets, but they are both inherently cyclical and pretty well saturated. An OEM that remains focussed on either - or both - is an OEM that will shrink in real terms.
Much has been made of Paccar’s planned engine facility in the Southern US. MX is heading for the US, certainly, and we assume that a US built plant will also be landing in Europe as well; the state of the dollar now makes the US a medium-cost manufacturing centre, and employment costs in the South are minimal.
But a closer look at MX raises some questions. In Europe, it has a captive market of around 30.000 units. Let’s say 20.000 for Paccar – being generous – in NAFTA. Given that this engine platform was designed from the sump up, a 50,000 per year demand doesn’t look too good in terms of what must have been big R&D costs. Maybe Paccar is assuming that the CAT / Cummins duopoly is now dead, and wants to hive a 16 litre unit off the MX drawing board, and maybe its is hoping for some incremental business as a result.

And so our take on Paccar at present is very good but needs watching. It is geographically awkward, and we feel that there are big costs lurking somewhere in the background. We await next year’s numbers with keen anticipation.