Executive Summary / Key Takeaways

• PACCAR Inc. demonstrates remarkable resilience and strategic foresight, leveraging its strong domestic manufacturing base and premium product offerings to navigate dynamic market conditions, including evolving tariff policies and emissions standards.
• Despite a challenging truck market, PACCAR's diversified business model, particularly the consistent profitability of its Parts and Financial Services segments, provides a foundational earnings stream and mitigates cyclicality.
• Strategic investments in advanced powertrains, connected vehicle services, and manufacturing capacity, including the Amplify Cell Technologies joint venture, position PACCAR for long-term growth and leadership in future transportation solutions.
• The recent clarification of Section 232 tariffs on medium- and heavy-duty trucks and the "One Big Beautiful Bill Act" are expected to significantly improve PACCAR's competitive cost position and stimulate customer demand, particularly in the fourth quarter of 2025 and into 2026.
• Investors should monitor the recovery of the truckload market, the clarity around 2027 NOx emission standards, and the continued execution of PACCAR's technology roadmap as key drivers for potential earnings and margin expansion in the coming year.

A Century of Strength: PACCAR's Enduring Business Model and Strategic Foundation

PACCAR Inc., founded in 1905, stands as a global technology leader in the design, manufacture, and customer support of high-quality light-, medium-, and heavy-duty commercial trucks. Operating under the iconic Kenworth, Peterbilt, and DAF nameplates, PACCAR has cultivated a reputation for durability, performance, and customer-centric solutions. This long-standing commitment to excellence is underpinned by a history of financial stability, marked by 86 consecutive years of net income and an unbroken dividend payment record since 1941. Over the past decade, PACCAR has strategically invested $8.6 billion in new products, world-class facilities, and state-of-the-art technologies, solidifying its position within the competitive industrial landscape.

PACCAR's overarching strategy is deeply rooted in operational excellence, continuous innovation, and a robust, integrated ecosystem encompassing truck manufacturing, a vast aftermarket parts business, and comprehensive financial services. This diversified approach provides a significant competitive advantage, offering a steady stream of profitability across various economic cycles. The company's foundational strength lies in its ability to deliver premium trucks that command customer loyalty, supported by an extensive network of independent dealers who consistently invest in their businesses.

Technological Edge: Driving Efficiency and Future Readiness

PACCAR's commitment to technological differentiation is a cornerstone of its competitive moat. The company's core technology centers on engineering high-performance, fuel-efficient trucks. For instance, the DAF XF truck was recently honored as the Fleet Truck of the Year in the UK, recognized for its "best-in-class fuel efficiency and driver comfort". This focus on operational efficiency translates directly into tangible benefits for customers, reducing their total cost of ownership.

Beyond traditional diesel powertrains, PACCAR is actively investing in next-generation clean diesel and alternative fuel engines. A significant development is the Allison (ALSN) 4000 Series™ Transmission, now available with the CARB low NOx compliant PACCAR MX-13 engine for Kenworth T880 and Peterbilt Model 567 truck models. This pairing is "designed to optimize performance and reduce NOx emissions", addressing stringent environmental regulations while maintaining performance. The company also highlights that hybrid systems "might be able to improve fuel efficiency and likewise, greenhouse gas by double-digit levels", signaling a strategic push towards more sustainable and efficient solutions.

PACCAR's R&D initiatives extend to advanced driver assistance systems (ADAS) and integrated connected vehicle services. With 600,000 connected Kenworth, Peterbilt, and DAF trucks in operation, this connectivity "enhances our customers' operational efficiency, and vehicle uptime". This data-driven approach not only improves customer experience but also fuels the aftermarket parts business by enabling proactive maintenance and optimized service.

Looking to the future, PACCAR is making substantial investments in electrification. In 2024, the company formed Amplify Cell Technologies, a U.S. battery manufacturing joint venture, in which PACCAR holds a 30% interest. This strategic move is a "long-term strategic objective for our company to be able to offer our customers a full portfolio of powertrain choices". PACCAR contributed $44.70 million to this venture in the first nine months of 2025, with a maximum required contribution of $830 million. The goal is to develop "the lowest cost, highest quality batteries", ensuring PACCAR remains competitive as EV adoption curves evolve. Furthermore, a new $35 million engine remanufacturing facility in Columbus, Mississippi, slated to open in 2026, is expected to remanufacture approximately 5,000 engines annually at full run rate, supporting the longevity and sustainability of its engine platforms. These technological advancements and strategic investments are crucial for PACCAR's long-term competitive moat, enabling it to meet evolving customer demands, regulatory requirements, and maintain its premium market positioning.

Competitive Landscape and Market Positioning

PACCAR operates in a highly competitive global market, contending with major players such as Volvo Group, Daimler Truck Holding AG (DTGFF), and Traton SE (TRATF). PACCAR's competitive positioning is significantly bolstered by its strong domestic manufacturing presence, with over 90% of its U.S.-sold trucks produced in its Ohio, Texas, and Washington State factories. This local-for-local production strategy provides a distinct advantage, particularly in light of recent trade policies.

In the U.S. and Canada, PACCAR's Kenworth and Peterbilt brands held a heavy-duty truck retail market share of 30.30% in the first nine months of 2025, a slight decrease from 31.10% in the prior year. In the medium-duty segment, market share was 15.70% in the first nine months of 2025, down from 17.20% in the prior year. Despite these slight declines, management emphasizes that the company's team "did a really good job for the past several months, dealing with the cost disadvantage and unintended cost disadvantage", highlighting the resilience of its market position even under pressure. In Europe, DAF's over 16-tonne market share was 13.60% in the first nine months of 2025, compared to 14% in the prior year, while its 6 to 16-tonne market share saw an increase to 9.70% from 9.10%. DAF also maintains a significant presence in South America, with a 9.10% market share in Brazil for the first nine months of 2025.

PACCAR's integrated financial services, PACCAR Financial Services (PFS), also contribute to its competitive strength. PFS's finance market share of new PACCAR truck sales increased to 27.10% in Q3 2025 from 26.90% in Q3 2024, reflecting "higher share in all markets". This captive financing arm provides a crucial link in the customer lifecycle, fostering loyalty and offering stable profitability. While direct quantitative comparisons of all competitor financial performance are not publicly detailed, PACCAR's consistent profitability in its Parts and Financial Services segments provides a strong counter-cyclical buffer, often outperforming rivals during market downturns. PACCAR's focus on premium products and customer support, coupled with its strategic investments in technology, positions it favorably against competitors who may prioritize broader global scale or aggressive EV-only strategies.

Financial Performance and Liquidity: A Resilient Foundation

PACCAR's financial performance in the third quarter and first nine months of 2025 reflects a challenging truck market, yet demonstrates the underlying strength of its diversified operations. For the third quarter of 2025, worldwide net sales and revenues decreased to $6.67 billion from $8.24 billion in the same period of 2024, primarily due to lower truck revenues. Net income for Q3 2025 was $590 million, or $1.12 per diluted share, down from $972.10 million, or $1.85 per diluted share, in Q3 2024. For the first nine months of 2025, adjusted net income (excluding a $264.50 million after-tax charge related to European civil litigation) was $2.08 billion, or $3.95 per diluted share.

The Truck segment bore the brunt of market softness, with net sales and revenues decreasing to $4.38 billion in Q3 2025 from $6.03 billion in Q3 2024. Truck gross margin significantly declined to 5.80% in Q3 2025 from 13% in Q3 2024, primarily due to lower unit deliveries and reduced price realization. However, the Parts segment continued its strong performance, achieving record quarterly revenues of $1.72 billion in Q3 2025, a 4% increase year-over-year. Parts gross margins remained robust at 29.50% in Q3 2025. The Financial Services segment also delivered solid results, with revenues increasing to $565.30 million in Q3 2025 from $536.10 million in Q3 2024, and income before income taxes rising by 18% to $126.20 million. This growth was driven by retail portfolio expansion and higher portfolio yields, partially offset by an increased provision for losses on receivables, particularly in Brazil and the U.S..

PACCAR maintains a strong liquidity position, with total cash and marketable securities at $9.25 billion as of September 30, 2025. Cash provided by operations increased to $3.27 billion in the first nine months of 2025. The company's $5.69 billion in line of credit arrangements, with $5.26 billion unused, further underscores its financial flexibility. This robust liquidity, coupled with an investment-grade AA1 credit rating, provides PACCAR with ample resources and access to capital markets, enabling it to weather market fluctuations and fund strategic growth initiatives.

Outlook and Strategic Initiatives

PACCAR's outlook for the remainder of 2025 and into 2026 reflects a cautious yet optimistic view, anticipating a gradual market recovery and leveraging strategic advantages. The company forecasts U.S. and Canada heavy-duty retail sales to be between 230,000 and 245,000 units in 2025, with a potential increase to 230,000-270,000 units in 2026. European over 16-tonne truck registrations are expected to range from 275,000 to 295,000 units in 2025, and 270,000 to 300,000 units in 2026. South American heavy-duty truck registrations are projected to be 95,000-105,000 units in 2025, with a similar range for 2026. PACCAR anticipates delivering approximately 32,000 trucks in Q4 2025.

A significant catalyst for demand is the "One Big Beautiful Bill Act" (OBBBA), enacted on July 4, 2025, which provides 100% bonus depreciation for qualifying properties and immediate expensing of domestic R&D. Management believes this will "help spur some demand here in the fourth quarter". Furthermore, the clarity around Section 232 tariffs on medium- and heavy-duty trucks, effective November 1, 2025, is expected to be "positive for the Company", reducing tariff costs and improving PACCAR's competitive position. While Q4 2025 gross margins are expected to be around 12% as tariffs peak in October, management anticipates a reduction in tariff costs towards year-end and stabilization by early 2026, leading to improved margins.

PACCAR Parts sales are projected to increase 2-4% in 2025 and further in 2026, driven by ongoing investments in capacity, such as a new 180,000 sq ft Parts Distribution Center in Calgary, Canada, opening in 2026. Financial Services average earning assets are expected to grow 5-6% in 2025 and remain comparable in 2026. Capital investments are guided at $750-$775 million in 2025 and $725-$775 million in 2026, with R&D expenses at $450-$465 million in 2025 and $450-$500 million in 2026. These investments are focused on next-generation powertrains, advanced driver assistance systems, and expanded manufacturing capabilities, including a new $92 million chassis frame painting facility in Chillicothe, Ohio, opening in early 2026.

Risks and Challenges

Despite a robust strategic position, PACCAR faces several pertinent risks. The primary challenge remains the soft truckload market, characterized by overcapacity, which could lead to increased past due accounts, truck repossessions, and credit losses for the Financial Services segment. While the used truck market has been improving, a decline in freight transportation conditions could reverse this trend.

Evolving trade policies and tariffs continue to pose a risk. Although the Section 232 clarification is seen as positive, the "ongoing impact from import tariffs on truck order intake and profit margins remains unfavorable". PACCAR's truck and parts products have been negatively affected since March 2025 by U.S. government import tariffs. Furthermore, the uncertainty surrounding the 2027 NOx Emission standards presents a dual challenge: if the stricter 35 mg standard is implemented, it will increase vehicle costs, potentially impacting demand; if it is relaxed, it could remove a pre-buy incentive. PACCAR is prepared for either scenario, having developed engines to meet both current and future standards. Lastly, PACCAR continues to manage civil litigation claims in Europe, having recorded a $350 million pre-tax charge in Q1 2025 to address estimable remaining costs.

Conclusion

PACCAR Inc. stands as a compelling investment opportunity, firmly anchored by its century-long legacy of operational excellence, premium product offerings, and a strategically diversified business model. Despite recent headwinds in the truck market, the company's robust Parts and Financial Services segments consistently deliver strong profits, providing a vital buffer against cyclical downturns. PACCAR's proactive investments in cutting-edge technologies, from advanced clean diesel and hybrid systems to the Amplify Cell Technologies battery joint venture, underscore its commitment to long-term leadership in sustainable transportation solutions.

The anticipated clarity from Section 232 tariffs and the incentives from the "One Big Beautiful Bill Act" are poised to significantly enhance PACCAR's competitive standing and stimulate demand, particularly as the truckload market gradually rebalances. With a strong balance sheet, ample liquidity, and a clear roadmap for product and manufacturing innovation, PACCAR is well-positioned for earnings and margin expansion in 2026. Investors should recognize PACCAR's ability to translate its technological prowess and domestic manufacturing advantage into sustained profitability and market share gains, making it a resilient player in the evolving commercial vehicle industry.