Why Navistar Looks Like A Buy On The Dip Opportunity

Aug.22.14 | About: Navistar International (NAV)

Summary

Navistar is slowly getting better and looks set to take advantage of the improving truck market in the U.S.

Navistar's new products are gaining good traction, which makes a turnaround a stronger possibility.

Navistar's agreement with Cummins for supply of engines is another advantage for the company.

Navistar (NYSE:NAV) has been unable to profit from the improving trucking market. The company's shares are down more than 7% this year, as competition from rival PACCAR (NASDAQ:PCAR) and Navistar's own weak product development moves have taken a toll on its performance.

When the company released its latest second-quarter results, it reported a loss of $297 million. However, it should be noted that Navistar is trying its best to execute a turnaround, and its second-quarter report also points in the same direction. Navistar narrowed its loss from the year-ago quarter, and it also gained market share.

What's working?

Navistar's "Drive to deliver" turnaround plan seems to be working well, as the company's order backlogs increased 82% in the previous quarter from last year. The company also gained market share in class 6/7 trucks and class 8 markets. In fact, its class 6/7 market share increased to 26.4% from 25.8% in the year-ago quarter. In the class 8 market, the share increased to 14.9% from 14.5% last year. Looking ahead, Navistar expects to close the fiscal year with an year-over-year gain in market share, along with significant increase in volume.

As the North American economy is getting better, the company is positive about achieving its target going forward. To benefit from this market, Navistar is focusing on new products. It recently launched its latest truck, ProStar. Navistar calls it as the most efficient class 8 truck on the road. The company is pleased with the response that ProStar has received.

One of Navistar's major customers testified that ProStar had zero defects in the first 90 days in service, which is around 50% better than its competitor. Testimonies such as this should help the company build its brand image. In addition, in the class 6 and 7 category, Navistar has launched ISB-powered medium-duty trucks.

Going forward, the company has various new launches in its pipeline. Last month, it launched DuraStar and WorkStar trucks, which are powered by its 9/10 liter engine with selective catalytic reduction (SCR). Management is counting on this new launch and expects it to boost orders in the second half of the year, which will ultimately drive market share growth next year.

Challenges to consider

But, Navistar is facing headwinds in certain markets such as Brazil, where a tough economic environment is a challenge for the entire industry. Statistical data shows that, on a year-over-year basis, its MWM business in Brazil is projecting a 17% decline in demand for its engines. To counter these issues, the company will focus on cost reduction measures that will lower its break-even point.

In addition, the company is transitioning to engines manufactured by Cummins (NYSE:CMI), reflecting Navistar's efforts to get rid of a bad strategy. For the past three years, Navistar tried to comply with the U.S. Environmental Protection Agency using exhaust-gas recirculation (EGR) alone. But, EGR engines failed the company, forcing it to rely on pollution credits accumulated previously along with fines mounting to $2,000 per engine to sell trucks in the U.S. But now, Cummins is selling engines to Navistar that house a combination of SCR and EGR, which is used by all the players in the industry, according to the Wall Street Journal.

Better times ahead

Management also sees positive sentiments from customers on various fronts such as freight levels, rates, and profitability. Consequently, the company expects its situation to improve in the second half, citing improvement in retail sales.

Also, to increase its customer support, Navistar has launched OnCommand Connection, which will provide increased fleet management by supporting quicker repairs, and controlling maintenance and repair costs. Heavy Duty Trucking Magazine named OnCommand Connection one of the top 20 products of 2014, and Navistar might enjoy a competitive advantage as a result of this service.

Valuation

Another impressive fact about Navistar is its attractive valuation. Since the company is currently incurring a loss, it doesn't have a trailing P/E metric. However, since it is expected to return to growth going forward, it has a forward P/E of 21. In addition, the stock is pretty cheap considering that it has a price-to-sales ratio of only 0.30.

In fact, Navistar's price-to-sales ratio is lower than competitor PACCAR, which sports a ratio of 1.28. Hence, a cheaper valuation, combined with smart strategies, make Navistar look like an interesting investment.

Conclusion

Going forward, management is confident of maintaining sequential growth on a quarterly basis. Moreover, the company is intent on getting profitable once again, and given its product development moves, it seems to be moving in the right direction. The improving economic situation will also aid Navistar's turnaround. In fact, over the next five years, Navistar's bottom line is expected to improve at an annual rate of 9% a year, better than the decline of 8% seen in the last five. So, investors can expect a turnaround at Navistar, which makes it look like a buy on the dip opportunity.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.