BMO Capital Bullish on Trucking Recovery
BMO Capital released a research note Tuesday which detailed its bullish view of the trucking industry as a whole and four companies:
- Rush Enterprises, Inc (NASDAQ: RUSHA),
- Cummins, Inc. (NYSE: CMI),
- WABCO Holdings, Inc. (NYSE: WBC),
- PACCAR Inc. (NASDAQ: PCAR).
Analyst Joel Tiss took the lead on this note and began with a look at the industry as a whole. Tiss began with the comment, "While the trucking cyclical recovery has been taking much longer to unfold than expected, our patience seems to be paying off as many of the stocks have seen significant gains since the bottom in 2011". Tiss continued by stating he believes "earnings appear set to continue improving on double-digit volume growth largely driven by pent-up demand.
Looking to North America, Tiss notes that industry experts say truck fleet utilization is near 91 percent which he explains is "significant" because typically when utilization rates above 89 percent a expansion cycle occurs. Tiss also noted that each 1 percent above 89 signifies the need for approximately 35,000 new truck to be put into service.
In a look at 2014 through 2015, Tiss listed to Important factors, 1) 2015 will see follow-through to at least the 2014 demand levels; and 2) second half 2014 orders are likely to cool from the current pace, which is skewed seasonally.
After providing a outlook on the industry as a whole, Tiss gave a brief look on each of the previously mentioned companies.
BMO Capital upgraded Rush Enterprises from Market Perform to Outperform and raised the price target from $30 to $36 which is based on a 13x P/E multiple of 2016 EPS estimates.
Commenting on the firm's estimates, Tiss stated, "We believe
that the combination of integrating the slew of recent acquisitions and some expectation that Navistar will be able to claw back some of its lost market share is likely to make our prior EPS estimates too conservative." In light of this, BMO has raised its EPS estimates for 2015 and 2016 from $2.10 to $2.25 and $2.50 to $2.75 respectively.
BMO has maintained its Outperform rating on Cummins but has raised the price target from $144 to $160 which is based on a 14x multiple of 2016 EPS estimates.
Looking to Cummins' market exposure Tiss noted, "The out-sized exposure to emerging markets has been a bit of a drag in the shorter term but remains an area of longer-term attraction and market growth out performance." Tiss also noted that in respect to natural gas engines, Cummins has the best-in-class technology as well as the "largest lineup" of any manufacturer.
WABCO Holdings, Inc.
BMO has maintained it Outperform rating of WABCO Holdings but has raised that price target from $107 to $115 which is based on a 16x multiple of 2016 EPS estimates.
In describing the justification of this increased price target, Tiss emphasized WABCO's Automatic Manual Transmission (AMT) which allows for maximum fuel efficiency. Tiss explained this product has performed well due to WABCO's strong relationships with Daimler and Volvo, and the increased push by these companies to become global players in the trucking industry.
BMO has maintained its Market Perform rating on PACCAR but has raised the price target from $60 to $70 based on a 14x multiple of 2016 EPS estimates plus $3 to represent approximately half of the company's excess cash. Tiss explained that only half of excess cash was used because 1) a portion is "essentially restricted" to maintain a credit rating and 2) He believes it is unlikely the company will use this cash aggressively.
Tiss appears hopeful for PACCAR but remained cautious stating, "While the company has introduced a large number of new products and there are ample signs that end markets are recovering, it increasingly seems that customers see few differences among the various truck brands.
This may have a negative impact on PACCAR's medium-term ability to position its trucks at the premium end of the pricing spectrum." However, Tiss did note that incremental truck orders beginning in March have seen 3 - 5 percent price increase which he says should help profitability for the later part of the second quarter as well as the second half of 2014.
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