Analysts have recently turned in favor of Navistar (NAV), the truck manufacturer, after the company made a secondary offering that has addressed some of the questions regarding liquidity. Also, the street seems to be excited about the management's transition plan which is now more attainable after the improved liquidity status. There are 5-6 important catalysts that are expected to move the stock such as initiation of Cummins (CMI) manufactured engines in January, their EPA approval, reduction in engine losses, realization of savings through the cost-cutting program and improvement in truck net price realization. It becomes clear why Baird has recently upgraded NAV from Neutral to Outperform.
Before we discuss future catalysts for the stock, it is important to understand in which direction the Truck Industry is moving; the orders for Class 8 trucks were strong at 23,200 units. This month's orders were the largest for this year. The orders rose by 46% sequentially. However, they fell by 17% on a YoY basis. The street estimates October's orders to be around the 16k-18k mark.
Taking the figures from both the graphs, one can calculate that Class 8 forms almost 30% of the overall revenue (61%*49%).
The orders for Class 6-7 trucks rose by 18% YoY and 59% sequentially to reach 12,900 units. Most importantly, the street had estimated that orders would pick up by the end of 2012 and they expected only a modest tick up in the orders in October. The Class 8 orders averaged 15,500 units for the June-September time period. The sell-side expects orders to be 285k for both 2012 and 2013.
The secondary offering announced by NAV on October 24 was planned by the management to bring in funds for general corporate purposes. Normally, a second offering is perceived as a positive credit event. However, in this case, NAV's initiative of selling big chunks of the stock near its 52-week low sent alarm bells ringing in the market. Gimme Credit's Vicky Bryan claimed at this point that NAV needs another $200 million to seal the engine agreement with Cummins. Given that this is true, as NAV's credit default swaps suggest, the company is in a pretty dire situation and it has confused those investors that had earlier bought in on Lewis Campbell's recent optimism.
However, the street has taken this act positively and believes that it will help the company to achieve the different targets it has set.
One of the main future catalysts is the restructuring of operations. Previously, we discussed in detail how the company plans to trim its costs by cutting down some of its loss-making operations. The company had earlier announced that it expected to achieve $150-175 million worth of savings in 2013. Recently, the company announced that it intends to close its manufacturing plant in Texas by the first half of 2013. After this decision, the company has raised its estimates to $175+ million savings for the next year. Garland plant closure is expected to save $25-35 million of operating costs per annum and the employee separation program will cost the company $10 million.
- CMI 15-L engine shipments will start in January next year. The engine testing for 13-L is well on track and is expected to receive EPA approval in April. CMI's 15-L is expected to improve profitability through improved margins and reduction in fines (non-conformance penalties) that NAV had to pay on sales of non-EPA approved engines.
- The management believes that losses in U.S. engines are expected to move towards profitability through improved quality, sourcing and product rationalization.
- Management expects improved truck price realization due to the favorable response it has received for its new engine policy.
- Improved quality performance is expected to bring lesser warranty charges. The current estimates are for $60-75 million worth of warranty charges down from $123 million and $104 million for the first and second quarter of 2012, respectively.
The stock was recently upgraded by Baird due to its cheap valuations. Baird has raised the price target from $20 to $30. The company's earnings are expected to grow by 5% per annum for the next five years. We are bullish on the stock as most of the investor concerns have been addressed by the company's management.