The company, however, received a lifeline from the EPA (which was later thrown out in court) and it used the extra time to redesign its engines and source other engines from Cummins Inc. (NYSE:CMI). That kept the lights on and the Illinois-based company is now poised to get its own engines out into the market, hopefully recover some lost market share and keep a few activists (Carl Icahn and Mark Rachesky) at bay.
Cummins itself is inexpensive given that it trades at a forward multiple of 11x only vs. the industry average of 14x. Cummins Inc. (NYSE:CMI)’s stock price is expected to be driven by (1.) higher US truck market share; (2.) higher Brazil truck engine and after-treatment production; (3.) improved power generation operating efficiency following 4Q 2012 production cuts; and (4.) fewer inventory de-stocking headwinds than in 4Q.
Beyond the quarter, the management is expected to raise its full-year sales guidance driven by (1.) higher Navistar after-treatment sales, as current guidance assumes $19 million of sales; (2.) higher US truck market share, which is running 2% to 4% above guidance, and; (3.) higher Brazil truck production forecasts. In the longer term, the earnings estimates are expected to be beaten by over $1 billion of new product sales at well above-average incremental margins.
Only recently, Navistar International Corp (NYSE:NAV) announced that it has selected Cummins’ Selective Catalytic Reduction (SCR) after-treatment technology for use on its medium-duty engines, available beginning in the first quarter of 2014. Navistar reported production of 46,830 Class 5 through Class 7 trucks in 2012. This is expected to bring in $350 million worth of incremental revenue for Cummins Inc. (NYSE:CMI) in 2014.
Who took advantage of Navistar’s engine problems?
The market knows that the creator of Kenworth and Peterbilt trucks, PACCAR Inc (NASDAQ:PCAR), snatched the market share from Navistar after the latter ran into engine problems. As far as May’s performance is concerned, Paccar’s Class 8 retail sales share for May was 31.2%, an increase from its April share of 29.1%. PACCAR Inc (NASDAQ:PCAR)’s Class 8 builds share was fairly stable (28.5% vs. 28.8% in April) and with Paccar having built over 13,000 NAFTA Class 8 trucks in the first two months of 2Q (vs. 16,700 in all of 1Q), which seems supportive of PACCAR Inc (NASDAQ:PCAR)’s guidance of global production/deliveries +5% to 10% sequentially in 2Q. This despite what could be some still more muted European trends in the near term.
Paccar is considered to be the best-in-class OEM. The stock trades at industry average multiple of 14x. However, currently, it is not on the buy list given that the Street prefers the suppliers over the OEMs. Hence, the Street is more in favor of companies like Cummins Inc. (NYSE:CMI) and Allison Transmission rather than Navistar and PACCAR Inc (NASDAQ:PCAR). Moreover, Paccar has a high European exposure, which doesn’t bode well for the company given declining truck registrations in Europe.
Final word
Definitely, the North American trucking market looks bright. Europe has been, and will remain, a potential headwind for the truck players in the near future until the debt crisis is solved. Therefore, for the time being, I will prefer Cummins Inc. (NYSE:CMI) over PACCAR Inc (NASDAQ:PCAR) and Navistar (suppliers over OEMs), given that it is more immune to losses in Europe and in a better position to benefit from an improving North American market.
Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Cummins and Paccar. The Motley Fool owns shares of Cummins and Paccar.
The article Which Names to Buy Amid an Improving Truck Market originally appeared on Fool.com.
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