Goldman Sachs Downgrades Pacaar On Unexpected European Headwinds

Goldman Sachs has downgraded PACCAR Inc (NASDAQ: PCAR) to Neutral from Buy on weaker trucker pricing and rising raw material costs, which will hurt margins.

"Excess supply and sluggish freight demand have driven trucker spot rate declines of 15%+ from last year's levels, pressuring trucker returns and ultimately capex, in our view," analyst Jerry Revich wrote in a note.

Revich says his 2016 estimate for North American trucks remains broadly unchanged at 235,000 units, but cut his 2017 estimate to 217,000 units. However, he said electronic logging regulations should turn the cycle in 2018.

The analyst highlighted that the pricing turned negative in Europe as well as in North America this past quarter, while at the same time raw material benefits reached the highest levels in this cycle.

Revich said a recent surge in commodity prices limits Paccar's ability pass higher raw material costs to its customers, and the analyst sees margin risk for the company from rising raw material prices as early as fourth quarter of 2016.

"Specifically, a 10% rise in steel/aluminum prices corresponds to a roughly 170 bps/40 bps headwind to EBIT margins without any offsetting price increases," Revich elaborated.

The analyst also trimmed his 2016 EPS view to $3.92 from $3.95, while modestly raising revenue estimate to $16.084 billion from $16.033 billion.

"Truck share of GDP is now at normalized levels in Europe, and while freight indicators remain positive, the cyclical risk-reward is now more balanced, in our view," Revich added.

Revich also cut his price target on the stock to $63 from $67.