Analyst Moves PACCAR Shares Away From Sell, Upgrades To Market Perform

In a report published Monday, BMO Capital analyst Joel Tiss upgraded the rating on PACCAR Inc (NASDAQ: PCAR) from Underperform to Market Perform, while maintaining the $60 price target. The analyst expressed his confidence in the company's balance sheet, cash position and management track record.

The analyst expects "any potential downturn in the North American class 8 truck market over the next 12- 18 months" to be "relatively modest versus prior cycles while the European market appears set for a long-awaited recovery."

At the same time, there are concerns regarding EPS growth during the current cycle, given the impact of industry-wide weakness in pricing, with OEMs focusing on maintaining or improving their market share, combined with overall volumes that continue at levels below the peaks seen previously.

"We also note that while the company has expanded its geographic footprint and product portfolio (all with cash investments) over the current cycle, a look back at history reveals EPS trending toward breakeven at troughs, which will likely limit more significant multiple expansion at this point in the cycle even as a less severe downturn is currently forecast," Tiss stated.

While smaller investments are not expected to be adequate to offset core business cyclicality in a meaningful way in the next downturn, the analyst also does not expect PACCAR to allocate any significant amount of funds towards acquisitions or buybacks in the near future.

"It is more likely that, as North American demand slows, European truck demand improves some, cushioning the cyclical blow and hopefully the fact that this North American cyclical upturn has not been as strong/parabolic as some prior cycles, the downturn will be equally as measured, keeping trough EPS well above breakeven as interest rate policies normalize across the planet," the BMO Capital report added.