Pricing, Production Drive Incremental Margin Gains for This Truck Holding

Paccar (PCAR), the parent of heavy- and medium-duty truck brands Kenworth, Peterbilt and DAF, delivered a strong third quarter, with revenue up 19% to $7.94 billion and net income up 44% to $847.5 million.

In between those figures we saw not only higher sequential and year-over-year operating margins for the company’s Truck & Parts business, but incremental margins north of 20%. This tells us that as Paccar’s production levels are rising, the company is benefitting from economies of scale, improving price realization and other production synergies.

North American Truck deliveries totaled 40,100 units in Q3 2026 up from 38,700 in the prior quarter, and the lucrative Parts business delivered a record quarter of $1.78 billion. Back in July, Paccar management shared expectations for second half industry truck sales to be around 145,000 units, up from 105,000 in the first half of the year. Today, the company’s guidance implies that figure for the back half of 2026 is now looking more like 145,000 to 155,000 with continued gains in 2027. Next year, Paccar’s initial stab is for 240,000 to 280,000 truck deliveries. As for why truck demand is improving, management reiterated several of the points that we’ve shared with you: economic growth, infrastructure investment, a recovering freight market and fleets that have been buying below replacement levels. Management also noted that infrastructure spending is a particular tailwind for the vocational market, where Paccar holds roughly 40% share in North America.

For the fourth quarter, Paccar expects deliveries to rise to 41,000 to 43,000 trucks in North America as suppliers catch up, and its 2026 build schedule is full. Paccar Parts is expected to keep growing in the fourth quarter and to finish 2026 within its prior 3% to 5% growth forecast. Higher deliveries bode well for the company’s high margin Financial Services segment.

In terms of the company’s 2027 truck outlook, it admitted that until the nonconformance penalties (NCPs) tied to the 2027 emissions rules are finalized, which management hopes will happen in four to eight weeks while noting the timing is unclear, some customers are holding back on 2027 orders. This suggests that even though demand remains favorable, near-term visibility is limited. Outside North America, Paccar sees Europe’s above-16-ton market holding at 300,000 to 320,000 trucks in 2027, and DAF saw order activity pick up in the second half of 2026, prompting Paccar to increase build. In South America, the above-16-ton market is expected to grow to 105,000 to 115,000 trucks next year, from 100,000 to 105,000 in 2026.

In our view, it’s that near-term diminished visibility in the core North American market that is weighing on PCAR shares on Tuesday. It also leads us to conclude that NCP clarification and monthly truck order figures in the coming months are catalysts that could re-ignite PCAR North American business and the shares. Firmer pricing in the company’s truck backlog should improve further as truck demand heats up, driving greater operating leverage and incremental margins in 2027. It should also lift the Financial Services income as well.

For now, we’ll maintain our Two rating and look to the soon to be released October heavy truck preliminary order data and then the same for November. Somewhere between them we are likely to hear more about finalized NCP penalties. We will also continue to track data points for the manufacturing economy, truck tonnage and fleet spending plans, which will also us get a bead on monthly truck order prospects.

Should industry orders levels turn up, it would be a sign of further productoin gains and better margins in 2027. Near 2.5% of the Portfolio’s assets, we have ample room to grow our exposure and improve the position’s cost basis as those data points are released.

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At the time of publication, TheStreet Pro Portfolio was long PCAR shares.