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Navistar (NYSE:NAV) made headlines today with its skillful avoidance of a proxy fight with investor Carl Icahn. The stock surged 7.54% after the announcement. However, Navistar's share price still is only at $22.81, a fraction of the $60.00 share price it enjoyed at the start of 2011.

Is Navistar worth a second look?

  • Navistar is still the leader in North America in the production of medium and severe service trucks as well as in school buses.
  • Truck sales are meant to increase by around 5% in 2012 which will help Navistar's profit margins. Navistar has also invested heavily in developing new types of trucks such as the new electric truck, eStar, which will help it gain new sources of revenue.
  • Navistar's revenue increased by more than 10% last year and its operating income increased both in 2010 and in 2011. It has also more than doubled its capital expenditures from $197 million in 2009, to $526 million in 2011, showing the management's willingness to expand the company leading to higher profits for shareholders.

However,

  • However, Navistar, like Ford (NYSE:F) at one point, has a gigantic health and pension fund which is likely to cost Navistar at least $2 billion over the next couple of years due to underfunding in the pension fund.
  • A declining US military budget will cut into Navistar's profits as the military is one of its main customers. In is worth noting though that this cut in the military is by no means a certainty after Mitt Romney's resurgence in the polls and his vow to increase military spending if he is elected.

Taking all of this into account, I believe Navistar's management, under the leadership of CEO Lewis Campbell, can overcome the short term problems it faces and emerge stronger than before just like Ford has. However, it will take a while so short term investors will not be interested in this stock. Nonetheless, Navistar's fair value is clearly much higher than its stock price would indicate, perhaps even as high as $40.00, more than a 90% upside. My view that it could move as high as $40.00 is based primarily on Morningstar's valuation of Navistar which puts its fair value at $43.00 per share after taking in lower revenue and profitability projections.

Source: Is Navistar Primed For A Resurgence?