Piper Jaffray Calls PACCAR Selloff 'Groundless,' Upgrades Stock To Overweight

• Shares of PACCAR, Inc. PCAR saw a more than 11 percent decline since August 19, dropping from close to $63 to a little over $56 at market close on August 25.
• Piper Jaffray’s Alexander E. Potter Sr. has upgraded the rating on PACCAR to Overweight, while raising the price target from $65 to $68.
• Potter believes that the recent sell-off in the stock was unjustified, given the company’s lack of debt and exposure to China or oil & gas, as well as its dividend yield and rising market share.

“The stock's valuation has dipped this low only a few times since 2006, and the multiple has seldom stayed this cheap for long,” Potter stated, while adding that the company’s fundamentals were attractive in the current scenario.

While there could be investor concern regarding the upcoming truck cycle peak, Potter expect PACCAR to be able to “muscle through” this headwind, even if over 60 percent of the company’s truck volumes comes from the US and Canada.

According to the Piper Jaffray report, “[U]nlike in previous cycles, PCAR is relatively well-equipped to offset a decline in Class 8 truck demand,” given that with the decline in truck demand in Brazil, the company is actually growing from a non-existent base. A recovery in Europe is also expected to benefit PACCAR.

Potter expects EPS growth to decline till 2017, which is likely to be a trough year, before resuming growth in 2018, driven by “higher parts revenue, rising share in Brazil, recovering EU truck demand, and medium duty truck exposure in the US.”

“We think investors will bid PCAR's multiple higher once they become convinced that a peaking Class 8 truck cycle will not cause earnings to unravel,” Potter added.