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One Factor To Consider Before Investing In PACCAR Inc (NASDAQ:PCAR)

Simply Wall St

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PACCAR Inc (NASDAQ:PCAR) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the industry, PCAR is currently valued at US$24b. I will take you through PCAR’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.

Check out our latest analysis for PACCAR

What is PACCAR's cash yield?

PACCAR generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.

There are two methods I will use to evaluate the quality of PACCAR’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

PACCAR’s yield of 2.51% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on PACCAR but are not being adequately rewarded for doing so.

NasdaqGS:PCAR Balance Sheet Net Worth, March 31st 2019

What’s the cash flow outlook for PACCAR?

Can PCAR improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 13%, ramping up from its current levels of US$3.0b to US$3.4b in three years’ time. Furthermore, breaking down growth into a year on year basis, PCAR is able to increase its growth rate each year, from -6.2% in the upcoming year, to 22% by the end of the third year. The overall future outlook seems buoyant if PCAR can maintain its levels of capital expenditure as well.

Next Steps:

The company’s low yield relative to the market index means you are taking on more risk holding the single-stock PACCAR as opposed to the diversified market portfolio, and also being compensated for less. Furthermore, its declining operating cash flow doesn’t seem appealing. Now you know to keep cash flows in mind, You should continue to research PACCAR to get a more holistic view of the company by looking at:

  1. Valuation: What is PCAR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PCAR is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on PACCAR’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.