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Still in High Gear

Truck equipment stocks have sped ahead of the broader market for many months, and analysts see several reasons for the trend to continue.

June 17, 1997|JAMES F. PELTZ

It's among the stock market's most mundane sectors--and lately, among its hottest.

Shares of truck equipment firms--the companies that assemble heavy-duty trucks and those that make engines and other truck components--have driven well ahead of the broader market for the last 12 months. Yet analysts are still recommending them.

Their rationale: Solid economic growth and strong demand for freight moved by trucks are lifting truck orders again after a lackluster 1996. The companies are also posting unexpectedly strong earnings growth and the stocks--despite their run-up--are still relatively inexpensive.

"The stocks remain cheap" based on profit expectations for the rest of the year, Lehman Bros. analyst Karen Ubelhart said. "Although the majority of these stocks have had a very positive performance over the past several months, it is too early to exit" the group, she said.

Indeed, many of the major truck equipment producers are trading at less than 20 times their expected 1997 per-share earnings, below the 22 price-to-earnings ratio of the Standard & Poor's 500.

This despite the fact that S&P's index of truck and parts-suppliers shares has shot up 46% over the last 12 months--compared with a 34% gain for the S&P 500--and has jumped 15% in just the last month.

The truck equipment business is a mature industry, meaning its growth tends to ebb and flow in tandem with industrial production. And with overall output improving, the equipment makers are benefiting.

Actually, the truck makers had their best year in 1995, when they turned out 245,000 trucks, said Gary McManus of J.P. Morgan Securities in New York. Production fell 22% last year, to about 192,000 units, and another decline was expected this year.

Instead, "we're picking up again, and that surprised people," McManus said.

The biggest U.S. maker of big trucks--which can cost upward of $70,000 apiece, depending on modifications--is Freightliner Corp., a unit of Germany's Daimler-Benz (whose American depositary receipts trade under the ticker symbol DAI).

Freightliner is attempting to pad its lead with its planned purchase of Ford Motor Co.'s (symbol: F) heavy-truck business for an undisclosed price. That deal was approved by U.S. regulators last week.

The stock of Daimler-Benz, like those of Ford and General Motors Corp. (GM)--which still makes medium-sized trucks--are naturally more dependent on their bigger auto operations. Nonetheless, improved truck sales have helped Daimler-Benz's ADRs rise 46% over the last year, to a recent $79.50 a share on the New York Stock Exchange.

Despite the enthusiasm, some analysts remain cautious toward the stocks. Christopher Mecray of Alex. Brown & Sons Inc. in Baltimore noted that price cutting in the truck freight market remains intense because there's still an excess of trucks available to shippers.

And with the trucking firms unable to raise prices, truck makers are also struggling to raise their prices--and that's preventing the latter's profit margins from widening.

"We haven't seen a lot of evidence of improved pricing [on truck sales], which should come with this increase in [sales] volume," Mecray said.

Nonetheless, Lehman's Ubelhart likes Cummins Engine Co. (CUM), a leading maker of diesel engines, and PACCAR Inc. (PCAR), which makes heavy-duty trucks under such brand names as Peterbilt and Kenworth.

Cummins, at a recent $70.25 a share, has surged 69% over the last year on the strength of higher demand and its own effort to shave costs and raise profit margins. The company also boosted its quarterly dividend by 10%, to 27.5 cents a share, this spring.

Cummins' stock does have a "history of underachievement," but "a new management team appreciates the situation and is addressing" the issue of bolstering its returns, analyst Charles Harris of Oppenheimer & Co. said in a recent report.

PACCAR likewise has been rewarding investors. The Bellevue, Wash.-based company had a 2-for-1 split in May, and earlier this month it raised the dividend payout on the newly split stock by 20%, to 15 cents a share. That was a factor in the stock's doubling in price over the last 12 months. It's currently at $50.25 a share.

Meanwhile, Detroit Diesel Corp. (DDC) is being touted by Harris and J.P. Morgan's McManus. McManus also has "buy" recommendations out for Eaton Corp. (ETN) and Navistar International Corp. (NAV), because "improved orders probably will result in positive" year-to-year sales comparisons for the rest of 1997.

Detroit Diesel gets a nod in part because Wall Street has seemingly ignored efforts by its chairman--auto-racing mogul Roger Penske--to bolster the company's performance, Harris said. Among other things, Penske recently dissected Detroit Diesel (whose customers include PACCAR and Freightliner) into nine business units to streamline its operations.

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