The 6.9% is a slowdown from the 7.8% rate in the third quarter and the 7.6% rate in the second, but is still extremely impressive. Actually, all the more impressive coming on top of the previous gains.  Meanwhile, unit labor costs, or how much it costs a business in wages and fringe benefits to produce a unit of output, dropped at an annual rate of 5.9%, a far bigger decline than the 4.4% original estimate and much more than the 4.5% expectation.

As the first graph below shows, both numbers tend to be extremely volatile from quarter to quarter and will move in opposite directions. Usually productivity will deteriorate as we head into a recession and in the early stages of one, but then rebound later in the recession and coming out of one.

The second graph smoothes out the spaghetti a bit by showing the same data on a year-over-year basis. On a year-over-year basis, the 5.8% rate is the highest since the first quarter of 2002, and has only been exceeded one other time since 1967 — a 5.9% rise in the first quarter of 1973.

Year-over-year unit labor costs are at a record low. This goes a long way towards explaining why we have seen such excellent earnings in recent quarters while the economy has been in such a deep slump and with unemployment near double-digit levels (and underemployment in the high teens).

Productivity & Standard of Living

Over the short term, the rise in productivity is mostly a reflection of fewer hours worked, rather than a robust rise in output. However, over the long term, there is nothing more important than productivity. It is what determines the standard of living in a country, not GDP.

After all, even under Mao, mainland China had a higher GDP than Sweden had, but the standard of living of a person living in Sweden was vastly higher than that of someone living in China at the time. Put another way, the principal difference between an American truck driver and a Chinese coolie is the truck. Both transport goods, but the U.S. truck driver is far more productive (tons moved per hour) because he has the tool, a big truck made by Paccar (PCAR). As a result he is able to have a higher standard of living.

In the short term, though, if a new truck design (say, pulling two trailers instead of just one) means that one truck driver is now out of work, his standard of living will go down, and the other driver (the one pulling two trailers) might go up a little bit. The trucking company, though, reaps a huge benefit, having to pay only one driver to move two trailers. Hence its unit labor costs go down. Higher productivity is both the enemy of employment (short term) and the powerful ally of higher standards of living (longer term).

Manufacturing & Productivity Gains

Nowhere is this dynamic more apparent than in manufacturing. The manufacturing sector has been losing jobs in good times and bad for the last 30 years or so, yet total manufacturing output in the country has continued to grow.

The third graph shows that productivity growth in manufacturing is much more volatile than overall productivity growth, but has generally been far higher than in the rest of the economy. The data for manufacturing productivity alone does not go back nearly as far, however, but that allows for a clearer picture of more recent overall productivity trends in that graph.

Factory automation has probably caused more jobs to be lost than outsourcing to third-world countries. However, we don’t want to cure the unemployment problem by reversing productivity gains.

Think about it this way: back in the 1950’s most telephone calls were completed by actual physical operators (think Lily Tomlin: “one ringy dingy, two ringy dingy”). We could immediately solve the unemployment problem tomorrow, and have massive labor shortages, if we simply outlawed the computerized switching of phone calls and had to have calls completed by actual human operators. Of course, that would mean that we would be back in the days where parents set the egg timer when kids were talking to their grandparents long distance. It would probably also result in Verizon (VZ) and AT&T (T) going bankrupt in a very big hurry.

Balance of Productivity Gains

Historically, the gains from productivity have been shared between the owners of capital and the workers. However, over the last decade or so almost all the gains have gone to capital. While capital definitely deserves to be compensated — after all, they provide the truck — having it capture all the gains means that gains in productivity have not translated into the traditional role of raising standards of living. It simply results in higher and higher levels of income inequality.

The U.S. has by far the greatest level of income inequality in the industrialized world. The best single measure of income equality or inequality is known as the Gini Index (named for a 19th Century Italian mathematician, nothing to do with Barbra Eden in a bottle).

The Gini Index ranges between 0 and 1, with 0 being sort of a Marxist wet dream of everyone in a country having exactly the same income (when tried their way it both never works since party insiders have a lot more than the workers and peasants, and to the extent it works everyone equally has nothing). The other extreme would be Czarist Russia on steroids, where one individual or family gets all of the income in an entire country.

The Gini Index is regularly computed by the CIA as part of it World Factbook (also computed by the World Bank). The data is not for the same year in each country, but for most countries it is from within the last decade. The most equal countries in the world are the Scandinavian countries, with Sweden the lowest at 0.23, closely followed by Denmark at 0.24. Europe as a whole (the EU) is at 0.307.

So where is the U.S. on this list? At 0.45. Which are the countries that have a distribution of income that most closely match that of the U.S.? Cameroon, the Ivory Coast, Uruguay and Jamaica.

Falling Unit Labor Costs Key

The plunge in unit labor costs is the flip side of higher productivity, especially when the higher productivity is not shared with the remaining workers through higher wages. For many companies, wages are by far the largest expense item on their income statement. So if you can make and sell the same number of things, and do so with far fewer workers, your profits will soar. Profits can even go up if sales go down, provided your costs go down faster.

While there are some special factors that affected them (mostly due to year-ago ugliness), year over year the total net income of the S&P 500 firms that have reported is almost double the year-ago levels, while total revenues are up less than 6%. Even if you strip out the Financial sector which had all the real ugliness a year ago, total net income is up 12.5% while revenues are up just 2.2%.

That is massive net margin expansion. The rising productivity and the falling unit labor costs are the key driver of this. Overall, the increase in productivity is a very good thing, but much more so for investors than it is for workers.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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(PCAR) U.S. Productivity & Standard of Living

For 2009, PACCAR reported income of $111.9 million 31 cents per share compared to $1.02 billion or $2.78 per share in 2008. The income is higher than the Zacks Consensus Estimate of 24 cents per share. Net sales and financial service revenues slashed 46% to $8.09 billion.

Revenue from PACCAR’s Truck segment fell 24% to $2 billion in the fourth quarter and plummeted 48% to $7.1 billion in 2009. In the year, PACCAR’s trucks under the DAF nameplate achieved a market share of 14.8% in the above 15-tonne market, the highest share in its 81-year history. On the other hand, the Kenworth and Peterbilt nameplates achieved a combined share of 25.1% of the U.S. and Canadian Class 8 retail market and 15.3% share of the Class 6-7 retail market in 2009.

PACCAR Financial Services posted a pretax income of $35.6 million in the quarter compared to the $45.4 million earned in the fourth quarter of 2008. Revenue in the quarter declined 13% to $254.9 million. For the full year, revenue dipped 20% to $1.01 billion and pretax income was $84.6 million compared to $216.9 million a year ago. The decline in annual profit was attributable to lower finance margins and higher truck repossessions in Europe.

Financial Position

PACCAR had cash and cash equivalents of $2.1 billion as of December 31, 2009. Long-term debt increased to $172.3 million as of that date from $19.3 million as of December 31, 2008. The long-term debt-to-capitalization ratio was as low as 3% as of December 31, 2009.

In 2009, cash flow from operations increased to $1.4 billion from $1.3 billion in 2008. Capital expenditures stood at $128 million in the year compared to $463 million in 2008.

Outlook

PACCAR expects sales for above 15-ton vehicles to lie in the range of 150,000–180,000 units in 2010. The U.S. and Canadian Class 8 retail sales are projected to be in the range of 110,000-140,000 units during the year 2010.

PACCAR plans to increase its capital investments in 2010 as the economy improves. The company has estimated capital expenditures of $175–$200 million, and research and development expenses of $225–$250 million, which are targeted at new products and for enhancing operating efficiency.

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(PCAR) PACCAR Maintains Profitability

Navistar seems to be bogged down by the economic slump, which has resulted in lower revenues at its military-truck unit due to a decline in freight volumes and the expiration of a contract with its largest customer, Ford, effective December 31, 2009, following a legal settlement.

Navistar also expects higher interest expense due to the refinancing of its debts at higher rates and a spike in research and development expenditures for the year. The Illinois-based truck maker is in the process of engineering its 2010 Exhaust Gas Recirculation (EGR) truck engines to conform to 2010 emissions standards from the Environmental Protection Agency (EPA).

In North America, the truck industry sales declined from 454,700 vehicles in 2006 to 181,000 vehicles in 2009, the worst performance in 47 years. However, Navistar expects the three-year decline to end this year and predicts North American sales in the range of 195,000 to 215,000 vehicles.

For fiscal 2009, Navistar revealed a net income (before special items) of $205 million or $2.86 per share, compared to $528 million or $7.21 per share in the previous fiscal. This was, however, better than the Zacks Consensus Estimate of $2.38 per share. Sales dipped 21% to $11.6 billion.

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(NAV) Navistar International Corporation Downgrades 2010 Outlook

Navistar accredited the improvement in profit to the recouped commercial truck volume and sustained military sales. Nevertheless, total sales of $3.3 billion during the quarter were lower than the year-ago level by 15%.

For fiscal 2009, Navistar revealed a net income (before special items) of $205 million or $2.86 per share, compared to $528 million or $7.21 per share in the previous fiscal. This was better then the Zacks Consensus Estimate of $2.38 per share. Sales dipped 21% to $11.6 billion.

Segment Performance

Truck: Segment profit declined to $147 million for fiscal 2009 from $805 million in fiscal 2008. This was attributable to decreased U.S. military sales, lower volumes in traditional markets and higher material costs. However, the company has increased its market share for Class 8 heavy duty vehicles by 6 percentage points on a year-over-year basis.

Engine: Despite lower volume, segment profit improved significantly to $253 million from $29 million (before special items) in fiscal 2008. The segment benefited from improved shipments in the reported quarter in the Truck segment.

Parts: Segment profit increased a staggering 72% to $436 million, driven by the company’s ability to expand into adjacent markets – primarily the military – without any significant investment in product development or distribution infrastructure.

Financial Services: Despite the challenging credit market, segment profit was $40 million in sharp contrast to a segment loss of $24 million in fiscal 2008. The impact of declining portfolio balances was offset by higher earnings from increased interest rates and fees charged to dealers, retail customers and manufacturing operations.

Financial Position

Navistar had cash and cash equivalents of $1.2 billion as on Oct 31, 2009. Long-term debt amounted to $5.4 billion as on that date. The company had a shareholder deficit of $1.8 billion as of the same period.

In fiscal 2009, Navistar had a net cash flow of $1.2 billion from operating activities. Meanwhile, capital expenditure reduced to $151 million.

Navistar International Corporation is a designer and manufacturer of diesel engines for the pickup truck, van, and sport utility vehicle markets. The company also provides retail, wholesale and lease financing of its trucks.

Since the earnings release reflecting the company’s improved results, shares of Navistar have gradually risen to more than 14% to a three-month high of $40.62 on Thursday, Dec 24, on the New York Stock Exchange. However, we continue to recommend the shares of the company as Neutral.

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(NAV) Navistar International Exceeds Earnings Expectations

Third quarter results included a one-time net gain of $9.0 million ($14.1 million pretax) related to the permanent closure of Peterbilt facility in Madison, Tennessee.

Results aggravate underlying concerns that recovery could be weak and uneven as high unemployment continues to slacken the growth in consumer expenditure that drives the economy.

Net sales and financial services revenues decreased 50.1% year over year to $2.0 billion.

The company has projected big rig sales in the U.S. in the range of 100,000 to 110,000 vehicles in 2009 due to lower housing starts and auto production. However, the company expects sales to grow to a range of 110,000 to 140,000 trucks in 2010, still way short the normal levels of 225,000 to 250,000 vehicles.

In Europe, the recovery is expected to be the slowest with 2010 sales expected between 150,000 and 180,000 vehicles.

The company intends to continue to reduce costs to proactively align operating expenses, capital and research and development expenditures with the current market conditions.

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(PCAR) Paccar Tumbles on Weak Growth

This was worse than the Zacks Consensus Estimate of 66 cents per share. The truck maker had reported a net income $331 million or $4.47 per share in the comparable quarter of the previous year.

Sales for the quarter slashed 37% to $2.51 billion, driven by poor sales at the Truck division. Manufacturing segment profit was $110 million, including the impacts of the Ford settlement (regarding the violation of an exclusive supply agreement), net of related charges, for the quarter compared with $473 million in the year-ago period.

Segment Performance

The Truck segment witnessed a sharp 48% drop in revenue to $1.51 billion. The segment reported a loss of $28 million versus a profit of $417 million in the year-ago quarter, which included major U.S. military sales as part of the company’s Mine Resistant Ambush Protected (MRAP) vehicle program.

The Engine segment revealed a 22% fall in revenue to $633 million. The segment delivered a $45 million profit, including a one-time gain on the change in equity ownership in Blue Diamond Parts, compared with a year-ago profit of $5 million. The impact of the global economic climate limited demand for diesel engines and is being mitigated by actions taken to reduce the segment’s selling, general and administrative expenses.

The Parts segment performed well with an 11% rise in revenue to $491 million. Supported by strong sales to the U.S. military, the segment profit was $93 million, an increase of 82% from $51 million in the year-ago quarter.

The Financial Service segment generated revenue of $92 million, lower by 3% compared to the year-ago period. The segment continues to demonstrate a quarter-over-quarter improvement as it delivered a segment profit of $20 million in the quarter compared with a segment loss of $1 million in the year-ago period.

Financial Position

Navistar reported manufacturing cash balances of $751 million as on July 31, 2009 compared with $594 million in the prior quarter ended April 30, 2009 . Cash flow from operations was positive, as were the net effect of other changes, including working capital, offset by capital investments and the purchase of Monaco.

Navistar had cash and cash equivalents of $821 million as on July 31, 2009 . Long-term debt amounted to $3.14 billion as on that date. The company had stockholders’ deficit of $1.35 billion as on the same date.

In the first half of 2009, Navistar had a net cash flow from operating activities of $899 million. Meanwhile, capital expenditures totaled $120 million during the same period.

Outlook

Navistar continues to project total truck industry retail sales volume of 165,000–185,000 units for Class 6–8 trucks and school buses in the U.S. and Canada for fiscal 2009. For 2010, the company anticipates the industry volumes to be in the range of 175,000– 215,000 units.

Navistar reiterated its profitability for fiscal 2009 despite reporting losses in the quarter. However, based on projections for increased income tax expenses and its forecast for the remainder of the year, the company has lowered its guidance for net income for fiscal 2009 to $182 million–$207 million or $2.55–$2.85 per share, excluding the Ford settlement and related charges. Including the impact of the Ford settlement, net of related charges, earnings are estimated in the range of $4.95–$5.25 per share.

Navistar affirmed its manufacturing cash balance of $700 million–$800 million for fiscal 2009. We recommend the shares of the company as Neutral.

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(NAV) Navistar International Hit by Weak Truck Market

The credit ratings agency has also affirmed its A1 long-term and Prime-1 short-term ratings for Paccar and the financing arm. A1 is an investment-grade rating four notches below the top triple-A rating. Obligations rated A by Moody’s are considered upper-medium grade and are subject to low credit risk.

Moody’s provides Prime-1 rating to taxable securities with maturity not exceeding thirteen months. Short-term ratings are based on the securities ability to honor short-term financial obligations.

In the second quarter of 2009, Paccar had lost a penny per share, excluding a one-time tax gain. Net revenues slipped 55% driven by a significant fall in volumes on the back of a weak economy. Truck sales declined 37% in the U.S. and Canada and dropped 67% in Europe, where Paccar makes trucks and engines under the DAF brand. For the company’s financial-services unit, profit dropped 73% from a year ago and revenue fell 26%.

Paccar expects truck sales to remain weak in Europe. The company has cut its 2009 estimate for European sales of trucks heavier than 15 metric tons to a range of 150,000 to 180,000 from the previous expected range of 180,000 to 220,000. Given the weak economy, we are apprehensive about Paccar achieving the target.

Moody’s expects the economic downturn to continue to hurt asset quality and returns of Paccar’s global financial services operations. It expects Paccar’s credit metrics to be very weak this year. However, the agency anticipates truck demand to improve slightly beginning 2010, which should be a respite for truck manufactures.

Based in Bellevue, Washington, Paccar is the third largest manufacturer of Class 6-8 heavy-duty trucks (with a capacity of more than 15 metric tons) in the world after Volvo and Daimler AG (DAI). We maintain our Neutral recommendation on the stock.

Zacks Investment Research
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(PCAR) Moody’s Gives Downgrade to Paccar

Company Description

Force Protection, Inc. with its subsidiaries, engages in the manufacture of ballistic and blast protected vehicles for military applications. The company’s primary customer is the United States military and has a market cap of $454 million.

Third-Quarter Results

Force Protection stepped up to the plate and delivered impressive third-quarter results on Nov 11 that were ahead of analyst estimates. Sales were up 66% from last year to $343.3 million.

Net income surged, jumping to $19.9 million from a loss of $800,000. This produced earnings of 29 cents per share against the expected 11 cents.

Margin Expansion

Force Protection helped its cause during by matching higher sales volumes with wider margins, with its gross margin increasing to 18.6% from 10.9% last year. The up tick was driven by higher volume in the company’s spare parts and service divisions, which carry higher margins.

Analyst Estimates

On a shorter term basis, the analyst community is bullish on this company, with the current-year estimates up 12 cents in the last 90 days to 58 cents per share. Based on this earnings projection, this stock has a forward P/E multiple of just over 11X, in line with the overall market.

The Chart

Shares of FRPT have been on a very smooth rally since breaking above the $3 mark in late November. Since then, this stock has topped-off above $7, an impressive short-term gain of more than 100%. Take a look at the chart below.

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(FRPT) Force Protection – forward P/E multiple of just over 11X, in line with the overall market