Will PACCAR Inc. Stock Make a Comeback in 2016?

Source: PACCAR

2015: A terrible year for PACCAR

Interestingly, there’s a huge disconnect between the drop in

PACCAR’s stock and its operational performance in

2015.

Double-digit growth in profits

Extra dividends tooPACCAR even declared a hefty extra cash dividend in 2015, in

line with a strategy it has been following for years

So why did PACCAR’s shares tumble despite the

higher profits and dividends?

Market fears triggered the sell-offFears of a downturn in the North American

trucking industry on weakening freight fundamentals: Some analysts expect to see 15%-20% drop in heavy-duty truck sales this year

Persistent weakness in key international markets like South America: PACCAR projects its Q4 global truck deliveries to fall 9% sequentially

So isn’t there a chance of PACCAR shares reviving in

2016? Let’s find out.

The bear caseLooming threat: Research firm FTR recently lowered

its 2016 forecast for new truck sales in the U.S. by 10% to 260,000 units

Actions underway: Several truck makers, including Daimler and Volvo, are reducing their workforce. PACCAR’s key engine supplier, Cummins, announced 2,000 layoffs late last year

Uncertainty in growth in markets like China and Brazil

The bull caseMissing signs of a slowdown: Preliminary FTR data

show a 70% sequential jump in Class 8 truck (key heavy-duty segment) orders in the U.S. for December after a rough November

Europe remains strong: PACCAR raised its forecast for its second-largest market last quarter

Undeterred by concerns: Despite the headwinds, PACCAR is projecting “flattish” gross margin for 2016

Foolish takeaway

Much of the pessimism seems to be baked into PACCAR’s share price, especially given the company’s consistently strong operational performance. The stock is also cheap, trading at under 10 times its trailing P/E, thanks to the sell-off. In short, there appears to be greater upside than downside in PACCAR shares going forward.

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