In the most recent weekly survey conducted by the American Association of Individual Investors, investor sentiment is at a multi-year low, thanks to soft first-quarter economic and earnings data. Sentiment may worsen even further if predictions of a weaker-than-expected second quarter prove accurate.

With the mood souring, a bullish outlook might seem out of touch, especially coming from an economically sensitive industry like truck manufacturing. But I certainly wouldn’t characterize management at commercial truck maker Paccar, Inc. (Nasdaq: PCAR) as out of touch. In fact, they are very bullish.

And why not? The nation’s second-largest producer of heavy-duty trucks (mainly the class 8 “big rigs” it sells under the well-known Kenworth and Peterbilt brands) has seen a robust rebound in sales trends in recent years. Sales approached $19 billion in 2014,  more than double the recession low of $8 billion and an all-time company record.

Paccar is off to strong start this year. During the Q1 conference call in April, management reported sales and earnings that handily beat estimates. They also raised their full-year estimate for industrywide class 8 truck sales in the United States and Canada to 260,000-to-290,000 units, versus an earlier projection for unit sales of 250,000-to-280,000. That compares to roughly 250,000 heavy-duty trucks sold in North America last year.

The key question: are trucking firms buying more vehicles to replace older ones, or are they actually expanding their fleets to meet greater shipping demand?

I think the latter factor is driving sales, in part because fleet utilization is high (around 90%). Also, freight volumes are in a clear uptrend, as shown by the American Trucking Association’s (ATA) seasonally adjusted truck tonnage index. This monthly measure of the gross tonnage of freight transported by trucks is considered a useful gauge of both U.S. shipping activity and the overall economy.

March’s reading, the most recent available, showed a 1% gain to 133.5, not far off the all-time high of 135.8 set in January. The truck tonnage index rose in five of the past six months, the ATA says.

This means Paccar should continue to shine in North America, where revenue from truck sales soared 34% in Q1 (compared to the year-ago quarter) after jumping 26% in 2014. North America is by far Paccar’s largest truck market, contributing nearly two-thirds of the truck segment’s revenue. Strength in the region is more than offsetting tough times in foreign markets, especially in Europe where strong dollar headwinds helped drive double-digit declines in truck sales.

To maximize orders, Paccar has been expanding its product portfolio, recently adding a couple of heavy-duty vehicles for use in the North American construction, utility and refuse industries. For those markets, the firm also recently introduced improved models of several medium-duty shipping vehicles designed for greater maneuverability in tight urban environments.

#-ad_banner-#For the European truck market, Paccar developed a line of heavy-duty construction, container and refuse vehicles. European offerings, typically sold under the DAF brand, also include a new low-noise delivery truck for use in urban areas with noise restrictions.

Although third parties historically provided the lion’s share of vehicle engines, Paccar is finding that it can build high-quality motors more cost-effectively in-house. This has led to a ramp-up in production of the powerful and relatively fuel-efficient MX-13, a heavy-duty diesel engine the firm introduced about five years ago. Currently, 37% of Peterbilt and Kenworth big rigs contain an MX-13 when they roll off the production line, management says.

Other key innovations include two new entrants into the natural gas-powered truck market, which is projected to expand by more than 70% in the coming decade, to nearly $5 billion. The two big rigs that Paccar is producing for this market can be configured to run on compressed or liquefied natural gas.

Looking forward, there should also be tremendous opportunity for growth through increased sales of aftermarket spare parts to Paccar’s independent truck dealers, which are located throughout North America, Europe, Australia, Central America and South America.

The parts segment is relatively small at present, with annual revenue of about $3 billion. But it’s been expanding by 15% annually for the past couple years, and should be able to maintain a similar pace of growth as an already extensive distribution network is expanded.

Within a few years, segment revenue may approach $5 billion annually. Since parts distribution is less cyclical and carries higher margins than truck manufacturing, a bigger parts segment provides an even larger buffer against cyclical downturns in trucking.

Risks To Consider: The European Commission could impose substantial fines on Paccar at some point. Along with other major truck manufacturers, the firm is accused of participating in a price-fixing scheme in European truck markets.

Action To Take –> Paccar’s management is justified in its bullishness. Since the dollar seems to have hit a ceiling, the highly successful North American business should continue to overshadow any currency-associated difficulties in foreign markets. This should allow Paccar to compound earnings by about 12% annually during the next few years, as Wall Street projects. The outlook could brighten further if the greenback gives up some ground.

Potential fines by the European Commission are an unwelcome wildcard, though any levies probably won’t be large enough to cause serious damage to Paccar’s balance sheet. Cash reserves alone total more than $3 billion, or nearly $8 a share.

Good news for value seekers: Paccar’s stock looks undervalued, based on the forward price-to-earnings ratio of around 14.

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