December Featured Recap
Executive compensation aligned to the ROIC model portfolio (-1.7%) was lower than the S&P 500 Index (+1.5%) from December 15, 2023 to January 10, 2024. The portfolio's best performing stocks rose 12%. Overall, from December 15, 2023 to January 10, 2023, 4 out of 15 executive compensation stocks that matched ROIC stocks outperformed the S&P.
This model portfolio includes only stocks with attractive or very attractive ratings and where executive compensation is consistent with ROIC improvement. Since return on invested capital (ROIC) is the primary driver of shareholder value creation, I think this combination provides a uniquely curated long list of ideas.
January New Stock Feature: Paccar PCAR
Paccar Inc. (PCAR) is an Exec Comp Rising Star in the January ROIC Model Portfolio.
Since 2012, Paccar has grown its revenue and net operating income after tax (NOPAT) by 7% and 15%, respectively, compounded annually. His NOPAT margin for the company improved from 6% in 2012 to 14% in the trailing 12 months (TTM). Over the same period, the invested capital turnover ratio increased from 2.5 to 2.8. The company's return on invested capital (ROIC) increased from 16% in 2012 to 39% TTM due to higher NOPAT margins and invested capital turnover.
Figure 1: Paccar Revenue and NOPAT: 2012 – TTM
PCAR Revenue and NOPAT 2012-TTM
New Construct LLC
Properly adjust incentives for executive compensation
Paccar's executive compensation plan aligns the interests of executives and shareholders by tying a portion of long-term awards to return on capital (ROC).
The company incorporates ROC, a type of ROIC, as a performance objective and contributes to the creation of shareholder value by promoting improvements in ROIC and economic returns. Using my company's excellent fundamental data to calculate his ROIC, I found that Paccar's ROIC increased from 16% in 2012 to 39% in TTM. During the same period, economic revenue increased from $806 million to $3.9 billion.
Figure 2: Paccar ROIC: 2012 – TTM
Improving PCAR ROIC
New Construct LLC
PCAR has room to rise further
At its current price of $94 per share, PCAR has a price-to-economic-book-value (PEBV) ratio of 0.7. This ratio means the market expects Packer's NOPAT to fall permanently by 30%. That seems too pessimistic for a company that has grown NOPAT by 22% compounded annually over the past five years and 15% compounded annually since 2012.
Even if you are a packer
- NOPAT margin drops to 9% (14% with TTM).
- Revenues will grow by 7% annually from 2023 to 2032 (equal to the compound annual growth rate of the past 10 years).
The current stock price is worth $115 per share, an increase of 23%. Check out the math behind this inverse DCF scenario. In this scenario, his NOPAT at Packer would grow by just 6% compounded annually until 2032.
For reference, Paccar has grown NOPAT by 22% compounded annually since 2017 and by 13% compounded annually over the past 20 years. If the company grows NOPAT further in line with past growth rates, the stock could rise further.
My company's robo-analyst technology reveals important details in financial documents
Below are details of the adjustments I made based on Robo-Analyst findings in Paccar's 10-Qs and 10-K.
Income Statement: We made a $212 million adjustment to eliminate net non-operating income of $130 million (less than 1% of revenue).
Balance Sheet: A $6.7 billion adjustment to calculate invested capital resulted in a net decrease of $4.5 billion. One of the largest adjustments was to other comprehensive income of $953 million (6% of reported net assets).
Valuation: Adjusted for $6.8 billion with net effect of $5.8 billion increase in shareholder value. Apart from excess cash, the most notable adjustment to shareholder value was his $548 million in overfunded pensions. This adjustment represents 1% of Paccar's market value.
Disclosure: David Trainer, Kyle Guske II, Italo Mendonca, and Hakan Salt are not compensated for writing about specific stocks, styles, or themes.
