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USA: "Unwavering Commitment: What the public thinks about manufacturing today" report

USA: "Unwavering Commitment: What the public thinks about manufacturing today" report. 16-page report by Deloitte.

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back to index backAMERItalk February,  2017


Trucks: Steps in Right Direction for North America Class 8 Market

Industry conditions improving, stocks already discounting. Indicators we track to predict Class 8 orders improved m/m during December; we believe this supports gradual return to replacement levels by spring (~230,000 order SAAR), more meaningful improvement by fall (high-200,000 order SAAR). Stocks, however, already discounting fundamental improvement in our view and historical trading patterns suggest investors sell the good news” as positive estimate reversion typically overwhelmed by multiple compression. During Q4, North America sales beat our estimates with in-line production; positive implications for PCAR, CMI, ALSN.

- We see negative risk/reward for truck stocks.

- While we continue to expect a bottom in Class 8 fundamentals during 2017 and recovery in 2018, significant appreciation in truck stocks during last twelve months likely discounts this improvement. Based on a historical trading analysis (link), we believe the group is entering a period where better fundamentals and positive estimate revision is more-than-offset by multiple compression, driving negative returns.

- We look to revisit our group call following a normalization in valuations at lower prices (5-10% price declines possible in our base case” scenario). We believe there is some early evidence of our sell the news” call playing out with the group trading flat-to-down versus the market YTD despite several positive upgrades on the sector by other analysts (upgrades citing a recovery in 2018 as we have noted).

- Commercial vehicle production finishes in line with our estimates during Q4.

- Overall output (medium/heavy) declined 23% year-over-year. Class 8 declined 34% (Baird estimate: -31%) while Class 5-7 declined 10% (Baird estimate: -13%).

- Positively, Class 8 sales declined 13% versus the 34% decline in build, helping to winnow inventories by over 10,000 units. Class 8 inventory-to-sales stand at 2.6 months; we believe normal” inventory levels of 2.0 months can be achieved by summer based on our current modeling.

- Company-specific implications.

- PACCAR. US/Canada Class 6-8 retail share increased 270bp year over year to 23%. In units, volumes declined 3% year over year versus our Q4 estimate of down 5%.

- Cummins. Through November, engine shipments tracking down 25% versus the Class 8 industry down 34%. Cummins is benefiting from outperformance at PACCAR/Navistar relative to Volvo/Daimler (smaller CMI users).

- Allison. Production in Allison’s core” NAFTA On-Highway markets declined 8% during Q4, slightly better than our -9% estimate. There is likely some negative mix with bus/RV strong and Class 8/6-7 weak, but this is already contemplated in our revenue estimate.

- Navistar. Through two months of FQ1, US/Canada Class 6-8 retail share is tracking up slightly year over year at 11.7%. Volume is down 15% which is below our -9% estimate.

To download 8-pages report, please click here.

Source: BAIRD - GAI






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