Earnings

Critical Comparison: PACCAR Inc (PCAR) vs. Navistar International Corporation (NAV)

PACCAR Inc (NASDAQ:PCAR) shares are up more than 14.13% this year and recently increased 0.10% or $0.07 to settle at $72.93. Navistar International Corporation (NYSE:NAV), on the other hand, is up 39.43% year to date as of 10/12/2017. It currently trades at $43.74 and has returned -0.88% during the past week.

PACCAR Inc (NASDAQ:PCAR) and Navistar International Corporation (NYSE:NAV) are the two most active stocks in the Trucks & Other Vehicles industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect PCAR to grow earnings at a 7.22% annual rate over the next 5 years. Comparatively, NAV is expected to grow at a 5.00% annual rate. All else equal, PCAR’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. EBITDA margin of 3.65% for Navistar International Corporation (NAV). PCAR’s ROI is 3.10% while NAV has a ROI of -60.90%. The interpretation is that PCAR’s business generates a higher return on investment than NAV’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. PCAR’s free cash flow (“FCF”) per share for the trailing twelve months was +0.00. Comparatively, NAV’s free cash flow per share was -1.00. On a percent-of-sales basis, PCAR’s free cash flow was 0% while NAV converted -1.21% of its revenues into cash flow. This means that, for a given level of sales, PCAR is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. PCAR has a current ratio of 4.90 compared to 1.20 for NAV. This means that PCAR can more easily cover its most immediate liabilities over the next twelve months.

Valuation

PCAR trades at a forward P/E of 16.49, a P/B of 3.42, and a P/S of 1.48, compared to a forward P/E of 22.18, and a P/S of 0.53 for NAV. PCAR is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. PCAR is currently priced at a -2.7% to its one-year price target of 74.95. Comparatively, NAV is 13.05% relative to its price target of 38.69. This suggests that PCAR is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for PCAR and 2.70 for NAV, which implies that analysts are more bullish on the outlook for NAV.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. PCAR has a beta of 1.25 and NAV’s beta is 2.77. PCAR’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. PCAR has a short ratio of 4.38 compared to a short interest of 10.79 for NAV. This implies that the market is currently less bearish on the outlook for PCAR.

Summary

PACCAR Inc (NASDAQ:PCAR) beats Navistar International Corporation (NYSE:NAV) on a total of 10 of the 14 factors compared between the two stocks. PCAR is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. PCAR is more undervalued relative to its price target. Finally, PCAR has better sentiment signals based on short interest.

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