PACCAR Inc

Paccar reported flat revenue of $7.5 billion year over year, through a 24% sequential increase, as fundamentals in the trucking industry continue to improve. EPS of $1.43 increased 4% year over year.

Why it matters: The company maintained its midpoint estimate of 250,000 units in the core US/Canada market in 2026, though production trends are expected to continue increasing throughout the year along with margins. Industry fundamentals are clearly improving with better economic growth, higher freight rates on lower capacity, and an older fleet, which is setting the industry well for replacement demand. The Environmental Protection Agency clarified its proposed NOx emissions regulations in July, which, if finalized, will likely smooth out the demand pull-forward. Customers will likely face eased penalties for noncompliance; therefore, sales of current engines will likely be distributed more evenly in 2026 and 2027.

The bottom line: We are increasing our fair value estimate for narrow-moat Paccar to $135 per share from $123 on improving industry fundamentals, increased clarity around EPA regulations, and the time value of money. Paccar continues to invest heavily in capital expenditure and research and development to preserve, if not extend, its competitive advantages versus peers.

Long view: Paccar Parts posted another quarter of record revenue at $1.75 billion. Growth is apparently accelerating, especially among fleet customers. Along with higher utilization of its trucks, we expect this growing installed base to continue compounding value for the company.

Our $135 per share fair value estimate equates to about 22 times our subdued 2026 EPS estimate. The valuation is not particularly demanding in a historical context.

Paccar saw modest weakness in truck deliveries in 2024, and 2025 showed accelerated weakness in the Class 8 truck market amid significant tariff-related headwinds. On the plus side, Paccar’s truck margins are structurally higher now compared with prior downcycles. The parts business posted modest growth in sales and operating profit in 2024, validating the thesis that its engine strategy is growing an installed base that needs service despite a challenging top-line environment. As a result, we anticipate that the parts business will maintain a high-single-digit CAGR of 8% during the forecast horizon, with operating margins continuing to expand to 27%. With incremental contribution likely at 40% or greater, the ongoing margin expansion is credible. These figures could prove conservative if Paccar announces new powertrain launches, which would mean the firm will take more share from Cummins.

As for trucks, we forecast a 10% revenue rebound in 2026, given a robust pull-forward of demand into 2026 before customers face more stringent US greenhouse gas regulations in 2027, as well as tax advantages resulting from the Republican tax and spending bill. We estimate margins can peak at 14% in this upturn, and sales growth tapers to a mid-single-digit rate, and margins taper off to an improved midcycle level of 12%. We estimate approximately 5% growth in the financial services division, given Paccar's selective, conservative approach to its balance sheet. We model some margin expansion in 2026-27, driven by a bounce in sales but with reversion as the cycle “normalizes.”

Our Stage II forecast period incorporates an estimated investment rate of 29% and an earnings before interest growth rate of 5% with perpetual growth of 3%. A 9% weighted average cost of capital derives from a market-average cost of equity and the firm’s current capital structure.

We assign Paccar a Morningstar Economic Moat Rating of narrow for both its trucks and parts businesses due to its intangible assets. These derive from its portfolio of strong brands, intellectual property (primarily engines), robust dealer network, and captive finance subsidiary, all of which create a clever mousetrap for customers. We believe trucks themselves can be substitutable due to a lack of meaningful functional differentiation, so we don’t see particularly compelling arguments for economic moats from customer switching costs or cost advantage.

The narrow-moat case for the trucks business is straightforward. Paccar’s truck products have premium positioning in heavy- and medium-duty markets. While priced approximately 10%-15% higher than competitors, Paccar has gained share because the machines are of superior quality. Higher pricing is justified through the ultimately lower total cost of ownership to customers such as large logistics fleet operators. Paccar develops trucks with superior fuel efficiency and overall greater durability (especially engines). Additionally, Paccar engineers offer a high degree of customization on virtually every sale, from the core cab design to the “bodies” that meet customers’ needs (envision a cement mixer, a mobile crane, or a garbage truck). Ultimately, heavy trucks are business-to-business products, and functionality is more important than comfort features. Nevertheless, the aesthetics of a cab are a meaningful part of a brand’s identity and generate meaningful customer loyalty. Operators often spend tremendous amounts of time in their trucks, so design characteristics such as a comfortable cab and more spacious sleeping accommodations are very important. This is because Paccar’s large institutional customers want to retain drivers and control their labor costs. Paccar excels in this area with its premium nameplates: Peterbilt, Kenworth, and DAF.

The high product quality and strong brand identities have increased Paccar’s market share, especially in the lucrative North American profit pool (approximately 30%), where it trails only Daimler’s Freightliner and Western Star brands. DAF has a respectable midteens market share in Europe. Volvo and Daimler also compete in this market, implying far more competition than the more consolidated North American market. Furthermore, we see Paccar's financials are vastly superior to those of its peers. Key metrics such as returns on invested capital, inventory turns, and selling, general, and administrative costs as a proportion of sales all reinforce Paccar’s premium positioning.

While Paccar has always provided the engines for its DAF trucks, it was not until 2010 that it launched its own engines on Kenworth and Peterbilt trucks in North America. Specifically, Paccar has launched 11-liter and 13-liter variants for customers, and approximately one-third of its trucks now employ these engines. The remaining two-thirds are primarily powered by Cummins 15-liter engines, which many customers prefer for their higher horsepower. We find this strategy of vertical integration and modest disintermediation of its most important supplier (Cummins) to be quite bold. While Paccar and Cummins have grown and succeeded together commercially in recent years, Cummins seems more dependent on Paccar (16% of 2024 sales) than the other way around. Paccar’s efforts at vertical integration may be underappreciated because increased engine production drives higher-margin sales in the parts business, with a time lag. For instance, Paccar’s very robust truck sales from 2021-24 likely don’t feed into parts sales over the next three to five years, creating compelling growth tailwinds. Paccar’s parts business has demonstrated revenue and operating profit CAGRs more impressive than the rest of the company in recent years, which is likely to continue. We anticipate even more intriguing developments as environmental regulations (mileage, emissions, and so on), which are a frequent catalyst in this space, pressure market participants to develop new products. Specifically, we are keen to see how this impacts the dynamic between Paccar and Cummins.

The parts business supports customers in 95 countries by supplying parts to over 2,000 dealers from 20 company distribution centers. It offers Paccar-branded parts and the TRP brand, which provides aftermarket parts for non-Paccar trucks. The company continuously refines best practices to ensure that dealers are stocked with the appropriate inventory to maximize customer uptime, employing tools such as e-commerce and connected machines to strengthen communication and support customers and dealers more efficiently. As discussed above, the rollout of Paccar engines in North America has created a growing installed base of trucks needing high-margin parts, and we expect this to continue.

Paccar Financial Services, or PFS, provides retail and wholesale financing for customers and dealers. Specifically, PFS primarily supports the sale of used trucks that the initial owners have traded in. As a result, PFS supports the trucks business by preserving strong residual values for the products. While bundling financing for sales is part of the value proposition and contributes to the firm’s intangible assets, we would describe PFS as a no-moat because Paccar seems to run it very conservatively. PFS maintains comparatively low financial leverage compared with a conventional finance company and focuses on the best-quality credits. Only approximately 25% of truck sales are financed by PFS, indicating that the company is very discerning in managing its exposure. Allowance for credit losses has historically been low, averaging around 1% of finance receivables. Paccar knows its customer base well, allowing the company to accurately assess credit risk, ultimately meaning that PFS can underwrite good loans and limit downside risk.

Paccar will continue to gain market share owing to its superior products.

The company can insource more engines, disintermediating key supplier Cummins, and enhancing profitability.

The company leads the industry with innovation in alternative powertrains and automation.

Trade wars and/or supply chain disruptions could reduce freight demand.

Environmental regulations may prove onerous and weigh on returns.

The market could be disrupted by innovation in alternative propulsion similar to Tesla/Rivian in passenger vehicles.