Navistar: Buy the Drop

Navistar International (NAV) shares have lost close to 47% of their value this year, which is surprising if we consider the growth of the trucking market in North America. The company has failed to capitalize on end market growth as its revenue has declined in recent quarters, which is primarily attributable to a decline in revenue from its worldwide operations segment, which has negated the positives in North America.

However, investors should not ignore the positives about Navistar, as I think it can get better going forward.

A look at the positives

Navistar has reported an improvement in its EBITDA on the back of cost reductions.

The company delivered quarter-over-quarter EBITDA margin improvement in the second quarter of 2015, as its adjusted EBITDA margin grew 160 basis points on a sequential basis. Cost optimizations are estimated to continue during the second half of 2015 as well. Going forward, chargeouts during the third quarter are expected to increase 8% on a year-over-year basis.

Going forward, the U.S. economic growth outlook seems positive, and hence, the outlook for the transportation industry appears solid. Growing freight rates, reduced engine costs, improving business environment, aging fleets and enhanced new truck fuel economy coupled with safety all combined deliver solid global demand for trucks.

The improving economic conditions in the U.S. along with growing EBITDA margins of Navistar positions it strongly for sustainable long-term growth fueled by notable top line growth and accelerated customer demand.

Navistar expects these economic conditions to get better in the near future and thus maintains its industry retail estimate for class 6 through 8 that includes bus to be in 350,000 to 380,000 units range for this year.

Improving chargeouts indicate better times

Navistar has actually exceeded its previously declared guidance for chargeouts in its key markets, recording growth of over 20% during the second quarter in this metric. Indeed, chargeouts grew approximately 40% compared to the first quarter and 10% on a year-over-year basis. Further, Navistar's market share increased during the second quarter as compared to the last quarter. In heavy-duty truck segment, Navistar's sales are expanding but its share has still not grown on a year-over-year basis. The order backlog for Navistar for all products is improving continuously.

Recently, a key leasing customer of Navistar selected its ISB engine and DuraStar chassis in combination to enable superior fuel economy and low cost of ownership all through the fleet. As a result of such contracts, its share is expanding with these strategically crucial buyers. Importantly, Navistar has also witnessed a major growth in its dealer wide sales, becoming a key success factor for the medium-duty segment.

Partnerships to power growth

Navistar has strategically partnered with PSI to deliver technology consolidation. The heavy-duty propane engines of PSI are clean, quiet, user friendly and offer robust performance, power, and reliability. Further, Navistar is increasingly receiving orders for its propane bus.

The superior performance-delivering DuraStar chassis and ISB engine is expected to drive solid demand expansion for these key products being further supported by Navistar's strategic partnership with PSI. The partnership will allow Navistar to increasingly implement superior technology advancements throughout the truck manufacturing processes.

In the service segment, Navistar has began the production of the accepted WorkStar model in conjunction with the Cummins ISB, increasingly growing the company's customer base. In addition, Navistar has strategically introduced the ProStar ES, featuring industry-leading aerodynamic, high fuel efficiency coupled with the launch of several other sophisticated technologies.

Conclusion

Even though Navistar shares have taken a beating in 2015, the company is well-placed to improve its financial performance going forward on the back of product improvements. Moreover, the company's cost-cutting moves have allowed it to improve the EBITDA. Thus, I think that investors should consider buying the drop in Navistar shares as it can do well in the long run.

Published on Sep 10, 2015
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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