PACCAR INC (PCAR) stock intrinsic value fair value estimate & owner earnings analysis

PACCAR builds heavy and medium trucks under the Kenworth, Peterbilt and DAF names, sells aftermarket parts, and finances and leases trucks through PACCAR Financial Services. Trucks were 68% of 2025 revenue of $28.4 billion. The company has earned a profit for 87 consecutive years, but truck demand is strongly cyclical: Truck segment pre-tax income fell from $2.85 billion in 2024 to $0.87 billion in 2025, while the Parts segment held near $1.67 billion and Financial Services rose to $485 million. HOW WE MEASURE EARNINGS. Owner earnings are operating cash flow with working-capital swings removed (including the large swings in financing of dealers' new-truck inventory), less stock compensation and the spending needed to maintain the plants and the leased-truck fleet. Leased trucks are depreciated in the cash flow, so we charge the net cost of replacing them. Per share, owner earnings for 2016 through 2025 were -$0.26, $2.50, $3.98, $4.39, $2.24, $3.88, $5.91, $9.31, $7.57 and $5.63. 2016 includes the $833 million European Commission fine paid that year; 2023 and 2025 include pre-tax charges of $600 million and $350 million for follow-on civil damage claims in Europe arising from that same case. The finance arm is treated as a lender: its $15.6 billion of commercial paper, bank loans and term notes funds $19.8 billion of loans and leases and $1.9 billion of leased equipment, and its interest cost is part of its operating cost, so that debt is not subtracted again. The truck and parts business has no borrowings and held $6.05 billion of cash and $3.21 billion of marketable securities at the end of 2025. STARTING LEVEL. We use 2019 to 2025 as the representative period: it contains two weak years (the 2020 pandemic and the supply-constrained 2021) and the 2023-2024 peak, and it reflects today's much larger parts business, whose revenue rose from $4.02 billion in 2019 to $6.87 billion in 2025. Earlier years describe a smaller business. Within this period we remove the one-off European claims charges and the after-tax interest earned on the cash pile (the cash is counted separately below). The median is about $5.62 per share. NEAR-TERM PATH. Owner earnings fell about 26% in 2025. We assume only a further 3% decline in 2026 because the second-quarter 2026 report showed net income of $752 million against $724 million a year earlier on revenue of $7.55 billion versus $7.51 billion, so the decline appears to have stopped. First-half 2026 net income was still about 9% below the first half of 2025 once the 2025 claims charge is excluded, which is why we do not assume a rebound. THE CASES (all discounted at 6%). Base, about $115 per share: 2026 at $5.45, then a return to the mid-cycle level. Only the parts business is credited with growth, at 3% a year, well below its 9% annual revenue growth since 2019, because a growing population of the company's trucks on the road and a steadily expanding parts distribution network (a new distribution center opened in Calgary in 2025) have produced that growth year after year. Truck and finance earnings are held flat. After year 10, earnings are held flat with no growth, supported by 87 years of unbroken profitability, the dealer networks and the installed base of trucks. The business is worth about $103 per share, plus about $12 per share of surplus cash, with no parent-level debt to subtract. Bear, about $80 per share: a three-year truck downturn at about $3.80 per share, the level of the weak 2021 year, worsened by U.S. import tariffs that the company says are hurting truck orders and margins, by rising credit losses in the finance arm (its loss provision rose from $31 million in 2023 to $125 million in 2025) and by one more European claims charge of the 2025 size. After that, mid-cycle earnings of $4.40, slightly below the 2016-2025 average of $4.52, giving no credit for the larger parts business, then $4.00 after year 10 to reflect European Union rules that require a significant share of trucks sold to be zero or near-zero emission, with significant fines for missing the targets. The business is worth about $68 per share plus $12 of cash. Bull, about $139 per share: 2026 flat at $5.62, then earnings at the 2022-2025 median of about $6.40, with parts growing 6% a year, still below its demonstrated pace. The business is worth about $127 per share plus $12 of cash. Not credited in any case: the 30%-owned Amplify Cell Technologies battery joint venture, market-share gains, a truck market recovery beyond mid-cycle, or electric-truck upside. SURPLUS CASH. From $9.25 billion of truck and parts cash and securities we subtract the $736 million dividend payable at year-end, the up to $421 million PACCAR may still have to contribute to Amplify (maximum $830 million, $409 million already paid), $265 million for any unpaid European claims (the after-tax size of the 2025 charge; the unpaid balance is not disclosed, so we assume all of it remains), and $1.5 billion kept for day-to-day operations. That leaves about $6.3 billion, or $12 per share. MARGIN-OF-SAFETY PRICE $70. This is below the bear value. From $70, reaching the base value within three years plus dividends (the company declared $2.72 per share in 2025) implies roughly 20% a year, and the bear case value sits above that price. Truck makers' shares often fall toward trough-earnings values during downturns, so the margin-of-safety price is set to cover the low case rather than the middle. CHANGE SINCE OUR LAST ANALYSIS. Our previous estimate (bear $48, base $108, bull $175) used higher discount rates for the riskier cases, assumed earnings would keep growing forever after year 10, and counted interest earned on the cash pile while also adding the cash itself. We now use a single 6% rate, credit no growth after year 10 and count the cash once. This raises the low case, lowers the high case and moves the middle up slightly. WHAT WOULD MAKE THIS WRONG: a lasting loss of market share in North America or Europe, a permanent margin squeeze from tariffs, a severe credit cycle in the finance arm with a collapse in used-truck prices, or a costly forced shift to zero-emission trucks in Europe. The one figure we could not pin down from the filings is the unpaid balance of the European claims accrual.