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USA: "Treatment of Contract Manufacturing for Foreign Base Company Sales Income Purposes" Alert

USA: "IRS Releases Final, Proposed, and Temporary Regulations on the Treatment of Contract Manufacturing for Foreign Base Company Sales Income Purposes" Alert. 25-page Alert by Baker & McKenzie.

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back to index backAMERItalk June,  2017


Trucks: North America Rebound May Be Set to Slow (May 2017 download report)

Negative risk/reward for truck stocks. While better-than-expected Class 8 orders continued into April, we believe tepid hard data and lack of participation from big fleets in recent activity increase the likelihood that orders moderate over coming months. In support of this outlook, OEM build rates are scheduled to peak in May and then moderate through August/September, suggesting recent order strength is not expected to continue. Despite a softening in Class 5-7 orders in April, backlogs remain healthy and OEM build schedules for Q2/Q3 moved higher.

Moderation in Class 8 orders presents negative risk/reward for stocks.

In recent months, the disconnect between tepid “hard data” for freight haulers and strengthening Class 8 orders has widened. We believe this increases the likelihood that a moderation in orders takes place over coming months which could serve to normalize valuations across the group.

In April, stronger-than-expected orders continued with intake of 24,000 (+75% yoy) annualizing near a 290,000 SAAR. In contrast, our own order prediction model suggests current industry conditions support a “normalized” order rate closer to 250,000.

Anecdotally, the surge in YTD orders has not come from big fleets (i.e., those more data dependent) but rather smaller operators that are requesting near-term delivery of trucks. As a result, build plans in Q1/Q2 have moved meaningfully higher to absorb these orders; the current Q2 schedule increased by 3% m/m and now anticipated 3% year-over-year growth (+800bp above our estimates).

Interestingly, OEM build rates are scheduled to peak in May and subsequently moderate through the August/September timeframe. This is not something we would expect to see if OEMs believed orders were due to hold/improve upon recent levels. In fact, the current Q3 build plan anticipates production near a 250,000 SAAR which matches where we expect orders to track over this same time period.

Class 5-7 orders soften, though backlogs remain healthy.

Medium-duty order activity moderated in April with intake of 18,800 (down 9% yoy) or 220,000 SAAR. Year-over-year declines were concentrated in the Class 5 segment (down 23% yoy) with growth from Class 6-7 trucks (+8%) and buses (+23%).

Despite a disappointing month, medium-duty orders have generally topped expectations in 2017 which has helped to grow backlog and provide tailwinds to OEM build plans. Production intentions for Q2/Q3 both increased by 1-2% this month, now calling for year-over-year growth which is +600bp above our current modeling.

Navistar recaptures market share in April fiscal quarter.

We expect Navistar to report its Fiscal Q2 in early June. Retail delivery volume in the core US/Canada Class 6-8 market declined 4% yoy, exceeding our estimate for an 11% decline. While Class 8 remains under pressure (-22% yoy), Class 6-7 rebounded by 10% yoy. The growth in medium-duty enabled overall Class 6-8 market share to increase to 16.1% versus 12.7% last quarter and 14.6% last year. Net, we expect this to be favorable for FQ2 results.

To download 9-page report, please click here.

Source: BAIRD - GAI



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