Paccar (Nasdaq:PCAR), manufacturer of Peterbilt and Kenworth trucks, recalled 16,000 vehicles on Feb. 6, 2012, due to potential brake problems. Despite the bad news, the truck maker continues to make strides regaining business lost in 2009. Its operating cash flow in 2011 of $1.59 billion is its third-highest on record. I believe the stock price will soon test its all-time high of $65.75. Here are three reasons why. (For related reading, see Analyzing Auto Stocks.)

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Fourth Quarter



Paccar earned $327.7 million in the quarter, a 93% increase year over year. On a diluted earnings per share basis, the increase was 97% or 91 cents a share. Net sales and financial service revenues were up 58% to $4.85 billion, a company record. Highlighting the fourth quarter was a special dividend payment of 70 cents a share. Paccar paid out $1.30 in dividends this past year, 88% more than in 2010. With the special dividend, its yield at year-end was roughly 3.5%. It has paid a dividend every year since 1941 and in most years, the dividend yield's been at least 1%.







From an operational standpoint, the highlight in the fourth quarter was construction getting underway for its 300,000-square-foot DAF Truck assembly line in Brazil. Kenworth trucks are already well known in South America, so the introduction of DAF Trucks in Chile, Ecuador and Peru in 2011, makes the timing of this plant very expeditious. According to Paccar's investor presentation, trucks of six tons or more in Latin America are expected to grow by 40,000 vehicles between 2011 and 2015. Globally, it expects 500,000 new vehicles will appear over the next four years and I'm sure Paccar expects its fair share. (To learn more, read Investing In Brazil 101.)







All of 2011



In the past year, Paccar's capital expenditures (CAPEX) including research and development was $823.2 million. In 2012, it expects to spend about the same. Its free cash flow in 2011 was roughly $1.5 billion. Of that, $217.4 million went to dividends and $337.6 million for repurchasing stock at an average price of $36.86 a share. That's some tremendous buying considering its average stock price during 2011 was $45.16 a share. Management was able to buy back stock at just around 17% above its 2011 low of $31.57. Share repurchases rarely work out this well. Given the efficiency of their purchases, I would suggest that $31.57 is a definite floor price with your current downside at less than 30%.







Past Performance



This past year was more like years gone by delivering consistent cash flow and good revenues. If you look at the past decade, only once did it generate revenues of less than $8 billion and that was in 2002. In terms of operating cash flow, twice it has delivered less than $1.2 billion and that was in 2002 and 2003. Are you seeing a pattern yet? Only once was its net income below $300 million and that was in 2009. This is a company that's performed financially no matter where it was in the economic business cycle. It's for this reason its average annual shareholder return in the past decade was around 14% compared to almost 3% for the S&P 500. If you're looking for a relatively safe investment, this is it.







Paccar and Peers




Company


EV/EBITDA


Paccar


9.61


Navistar (NYSE:NAV)


7.68


Cummins (NYSE:CMI)


8.94


Ingersoll-Rand (NYSE:IR)


7.26


Eaton (NYSE:ETN)


9.02





The Bottom Line



The successful allocation of capital is what divides the haves from the have-nots. It's what defines future success. Like every company, Paccar's had trying times. But it's always recovered and that's a telltale sign of a resilient and winning business model. (For additional reading, see The Industry Handbook: Automobiles.)

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
Tickers in this Article: PCAR, CMI, IR, ETN

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