How to get your Portfolio Trucking Higher!

Investors get too wrapped up in short-term stock movements to appreciate how great stocks truly are. 2018 was a bad year, some thought, I better get out now before the bottom falls out. This is the reason we don’t like the term “stocks” because of the short-term thinking associated with it, we prefer to call them equities or a small piece of a large company. Why is that so important? Because it changes the mindset to think long-term and stay the course.

Let me give you an example of a company which has had positive earnings for 80 consecutive years, has paid a dividend every year since 1941 and for the last 20 years the dividend has increased on average 11% per year. I’m sure people sold out of this company in 2018 as the stock price fell from $72.57 on January 2nd, 2018 to close the year at $56.86 for a 21.6% decline not including the $3.09 in dividends paid in 2018. So, what is this company which has such a great long-term record yet is not in many portfolios? The company is named PACCAR and trades under the symbol PCAR. Your first thought may be, this is a small company too risky to put any money into. Not true, PACCAR has a market cap of $24 billion and I’m sure you have seen their trucks on the roads, Kenworth and Peterbilt.

The stock closed at $69.33 on Tuesday, February 26th and yes, that is a 27% gain since the December 31st close. The current valuations are still reasonable with a current PE of 11.1, well below the industry average of 18.00. Price to sales looks high at 1.03 above the industry at 0.45. Price to book value and price to cash flow are both higher than the industry at 2.80 versus 2.09 and 7.4 compared to 4.8 respectively.

While the valuations are high on the sales, book value and cash flow, the sales and earnings growth explain why this is. Sales year over year were up 20.8% for the company, well above the industry at 4.8%. Looking at EPS growth year over year, the company shines even brighter with growth of 46.7%, when the industry of heavy machinery and vehicles saw their EPS fall by 40.4%.

The untrained investment eye may be scared off by the debt to equity of 116% since they may not understand that PACCAR finances its trucks for their customers which makes the debt to equity appear worse than it is. This means the company carries paper for financing of their trucks. This is also a growing part of the business which saw record financial services new business volume of $5.23B in 2018.

The company has a unique way of paying out their dividend, in 2018, the first dividend was $0.25 followed by three at $0.28, and the December dividend was $2.00. The company has done this for years, when profits are big, they share them with their shareholders, in lean times they retain cash to keep the business operating and help even out the ups and downs of the business cycle, what a smart concept.

The company has a very good profit margin of 9.3%, well above the industry average of 2.5%. The equity for PACCAR has grown from $6.7B five years ago to the current $8.6B, this is impressive because the stock buybacks and dividends paid over the years often slows down the equity growth of a company. On top of that, the company has a return on equity of 26.4%, well above the industry at 10.6%.

Looking at the efficiency of the company, I find no problems on the receivable turnover of 19.2 times over the last twelve months compared with an industry turnover rate of 3.9, the higher the number the better. The inventory turnover also looks very good for PACCAR at 18.1, compared to the industry of 10.5 over the last 12 months.

Looking out to December 2020 the mean EPS estimate of 18 analysts is $5.67 which would yield a very reasonable forward PE of 12.2. There are equities out there which are overpriced and this company is not one of them. Using a forward multiple of 16.5, the target sell price on this company is $93.56, roughly 35% above current levels.

If you like investing in businesses with consistent, growing earnings and have the patience to watch and read the company quarterly reports for five years, maybe this is a company which will look good in your portfolio.