Article Source: Baird Equity Research | September 2017 |
Global Commercial Vehicles
Trucks: NA Outlook Improves; Positive Takeaways for NAV/ALSN
Improving outlook for Class 8 truck orders with recent storms boosting freight pricing and volume trends solid. We find current environment reminiscent of the late 2013-early 2014 period that kickstarted the last cyclical upturn and we expect to increase our near-term build/sales estimates to reflect this strength. For stocks, we remain more cautious as robust orders are likely to bring questions of whether conditions have peaked, typically driving underperformance despite rising earnings. Our best ideas have drivers beyond the cycle: MOD, ALSN, NAV, WBC.
Industry conditions improving, though we remain cautious on stocks.
- We believe August Class 8 orders (286,000 SAAR vs. 260,000 YTD pace) are likely the first glimpse of a strong order season through early 2018 as truckers benefit from improving volume/price and moderating used equipment declines. Stronger orders through yearend are also likely to alleviate pressures we have highlighted from build rates tracking near a 280,000 SAAR in recent months (high relative to the 260,000 YTD order pace but likely reasonable should orders meet/exceed August levels). Consequently, we expect to increase our North America estimates for Q3/Q4 in coming weeks with very strong output– Class 8 tracking up 35% yoy and Class 5-7 up 10-15% yoy – a tailwind for second-half earnings.
- For stocks, we remain cautious as a robust order season (as we expect) has historically driven views that fundamentals are peaking, resulting in multiple compression and relative underperformance. Such was the case during the last upcycle, when orders inflected in late 2013-early 2014 (a similar period marked by capacity constraints and strong pricing), stocks peaked in late 2013, yet earnings ultimately peaked in 2015.
- Our best individual ideas remain those with revenue/margin/cash flow drivers that go beyond a Class 8 cycle call: Modine (self-help transformation), Allison (deeply discounted valuations with consistent EBITDA/FCF growth), Navistar (rebounding market share and margins), WABCO (best-in-class secular growth from safety/efficiency).
Class 8 update; Navistar market share surges.
- August orders of 21,200 (+50% yoy) annualize at 286,000 SAAR and were 7% better than our estimate entering the month. Production likewise improved to 25,600 units (+35% yoy, 282,000 SAAR) but appears more manageable in light of the month’s order rate. OEMs made little change to Q3/Q4 build plans (seen +32% and +38%, respectively).
- The notable retail share development in August was Navistar reporting a 15.7% share vs.10.7% last month and 11.8% last year; unit volume increased 43% versus the industry’s +8% rise. This also follows a very strong quarter for Navistar orders (+73% vs. +39% industry). We believe both are indications the new product portfolio is gaining traction.
Class 5-7 trends higher; Allison applications grow above market.
- Class 5-7 production increased 23% in August and 19% QTD, with OEM build plans expecting double-digit growth to continue into Q4 (+11% yoy). In the core segments for Allison, production is up 26% QTD (above our +17% estimate).