Investment Jungle

Continuing on with Mr. Beantown’s list of potential Rule #1 stocks, we will be analyzing Paccar Inc which trades on the NASDAQ under the symbol PCAR.

Company Profile:

From Yahoo Finance

PACCAR, Inc. engages in design, manufacture, and distribution of light, medium, and heavy duty trucks, and related aftermarket distribution of parts worldwide. The company’s trucks are used for over the road and off highway hauling of freight, petroleum, wood products, construction, and other materials. It also provides finance and leasing services to its customers and dealers. In addition, the company manufactures industrial winches. It sells trucks and related parts to independent dealers.

Market capitalization is $20.73B.

Fundamental Analysis:

Fundamental analysis means looking at the Big Five.

Rule #1 investors demand that the return on invested capital exceed a minimum of 10% for each of the last 10 years. Unfortunately, PCAR does not meet that standard. In 2001 and 2002, management delivered sub par ROIC of 4.6% and 9% respectively. Other than those 2 years, management was able to meet the minimum. In fact, the 5 year average ROIC is 13.6%.

Return on equity has been significantly better - and improving. The 10 year average ROE is 21.84%. The 5 year average ROE increases to 23.59%.

The equity growth rate has remained fairly consistent with a slight upward trend. The 9 year rate is 13.08%. The 5 year rate rises to 15.62%. The 3 year rate dips to 12.54%, but last year’s rate rebounds to 16.48%.

The earnings per share growth rate has been on more of a roller coaster ride. the 9 year rate is 16.25%. The 5 year rate skyrockets to 53.22%! The 3 year rate stays at these lofty rates with 42.38%. And last year’s EPS growth rate has dropped to a still impressive 27.92%.

Sales growth rates have been climbing. The 9 year rate is 8.52%. The 5 year rate jumps to 23.19%. The 3 year rate stays up there at 25.87%. Last year’s rate dipped to 17.05%.

Cash flow growth rate follows a similar pattern. The 9 year rate is 16.58%. The 5 year rate skyrockets to 41.3%. The 3 year rate stays close at 36.03%. And last year’s rate remained at a respectable 24.92%.

All in all, these growth rates have not exhibited the normal Rule #1 behaviour of increasing over the years or at least staying consistent.

Stock Analysis:

Let’s slap a sticker price on this stock.

For my future EPS growth rate, my initial estimate was 13.08%. This was derived from the 9 year equity growth rate. Analysts have forecast a more conservative 12%. Who am I to argue? I’ll go with their estimate.

For my initial future PE, I chose the 10 year average PE of 11.95. That is inline with the 5 year PE of 11.96. However, these are lower than the current PE of 14.63.

With this information, my sticker price works out to $34.74. At the current price of $55.41, Mr. Market is demanding a premium of 59.5%!

Here is my Rule #1 analysis of PCAR.

Here is the 1 year stock price chart:

As you can see, this stock has been on a healthy climb over the last 12 months.

Conclusion:

So, have we found a Rule #1 stock? I would argue that between the ROIC missing to meet minimum levels in 2 of the 10 years, and the fact that the growth rates are not steadily increasing (or at least remaining steady), this is not a Rule #1 stock.

What are your thoughts?

Full Disclosure: I do not own shares in PCAR.

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