Elon Musk’s announcement of a Tesla semi-truck last week got me wondering if heavy truck manufacturing is a profitable business. That led me to take a look at the ycharts data for PACCAR (NYSE: PCAR), the parent of Peterbilt, DAF, Leyland Trucks Limited and Kenworth.
Guess what, entering the truck business would be a very smart move because PACCAR is a very profitable company. Manufacturing heavy trucks may not be as glamorous as building sports cars or flashy sedans, but it certainly is lucrative. Successfully manufacturing and marketing a semi would give Tesla Motors (NASDAQ: TSLA) a stream of revenue and serious street cred in the auto business.
Why an Electric Semi-Truck Makes Sense for Tesla
Building a semi-truck would demonstrate Tesla’s technical prowess. It would also force the company to market to hard-nosed trucking industry executives rather than electric-car fans, which will encourage development of a very different sales skill set.
A functional and practical Tesla semi would be the ultimate demonstration of the utility and viability of electric vehicles. Musk would be able to put the charge that electric cars are just toys for geeks to play with to rest.
Beyond that there might be a large market for electric heavy trucks because of the growing movement to ban or limit the use of diesel vehicles around the world. Trucks, buses and heavy equipment are the biggest users of diesel. If Tesla can start building powerful vehicles and machines that run on electricity it will be on the verge of a huge market.
This would also make Tesla a value investment, which is another of Musk’s goals. Despite his reputation as a visionary and a risk taker, Elon is a hardnosed businessman who understands one must make money at the end of the day. He knows that if Tesla and SpaceX are to survive and he is to reach Mars, there must be a steady stream of revenue.
The Advantages of Electric Heavy Trucks
Electric garbage trucks, bulldozers and transit buses will not be as sexy as an S series or a Roadster but they will pay the bills. Such vehicles will have an inherent advantage that will appeal to many businesspeople: they run on electricity which is cheaper and far easier to distribute than diesel or propane.
Another potential advantage is that electric motors have fewer parts and require less maintenance than internal combustion engines. That means fewer repairs and less downtime which will be very appealing to a contractor or trucking company owner.
It also goes without saying that mass adoption of electric heavy trucks and equipment would increase the market and demand for some of Tesla’s other products. That includes the PowerPack lithium battery storage units and the panels from SolarCity. Those will be needed to supply the electric vehicles and machines with juice.
Does PACCAR Make Money?
Okay so that’s the argument for Musk but value investors will ask can one actually make money in the heavy truck business? PACCAR’s December 31, 2016, financial report proves the answer is yes.
PACCAR reported the following numbers for fourth quarter 2016:
- Revenues of $17.03 billion.
- A net income of $521.7 million.
- A profit margin of 7.09%
- A free cash flow of $289.70 million.
- Cash and short-term investments of $3.057 billion.
- $2.301 billion in cash from operations.
- Assets of $20.64 billion.
PACCAR is definitely making money, although its income has been falling off lately. In December 2015, PACCAR reported a net income of $1.604 billion that fell to $521.7 million just a year later. That proves truck manufacturing is an inherently volatile business, just like auto making.
PACCAR’s revenues are also very unstable; it reported $19.12 billion in revenue in December 2015, and $17.03 billion in December 2016. That’s a drop of $2.85 billion in a year, which shows trucks are not a steady money maker. Even though PACCAR can generate a lot of cash, its potential for generating float is limited.
Is PACCAR a Good Investment?
Despite that PACCAR is a pretty good investment. Its shareholders were rewarded with a return on equity of 7.73% on December 31, 2016.
They also received a dividend of 24¢ on February 10, 2017. That was down from the 60¢ dividend PCAR paid on December 14, 2016. One really nice thing about PACCAR stock is that it usually pays one very big dividend out every year, normally in December. On December 16, 2015, PCAR owners received an early Christmas present in the form of a $1.40 dividend.
All this makes PACCAR a decent value investment and something of a widows and orphans stock. It’s certainly a better deal than Tesla; PCAR was trading at $65.79 a share on April 20, 2017, while TSLA stock was selling for $303.95 which was ludicrous.
Is Tesla a Threat to PACCAR?
Naturally some people will wonder if Tesla’s electric semi would be a threat to PACCAR. I would say not because if electric heavy trucks become popular, Kenworth and Peterbilt would simply switch to building them.
That development might make Tesla a supplier to PACCAR, because it would need batteries and other components from the Gigafactory or Gigafactories. That might be Musk’s real plan to convince heavy equipment and truck manufactures to go electric so he can sell them lithium batteries.
Interestingly enough, Musk has made few a tweets about building a second U.S. Gigafactory somewhere in Ohio, Kentucky, or West Virginia. PACCAR builds Kenworths in Chillicothe, Ohio.
Another interesting question to ask is who is building Musk’s electric semi for Tesla. I doubt Tesla has the capacity to build one at its Freemont, California, plant. Was it Peterbilt or Kenworth? It’ll be interesting to find out.
PACCAR’s success shows that building heavy trucks would be a smart and profitable move for Tesla. PACCAR is also a good investment for average people while Tesla is not. Buying PACCAR might be a good way to invest in electric vehicles and avoid Tesla’s overpriced stock.