There are some fairly pervasive concerns for investors in 2015. China has been slowing so the effects and extent of government stimulus are being scrutinized. There is also difficulty in Europe, which has recently launched its own version of quantitative easing. Further, the United States dollar has been rapidly strengthening against virtually all other currencies making the products of the biggest companies more expensive to their consumers. With all these things in mind, success could potentially be found in a corporation with little exposure to the specified issues.
Meanwhile, the domestic economy is doing well by several measures. We have improving employment data and a net benefit from lower fuel prices. A widely quoted survey from the National Association of Business Economics forecasts 3.1% economic expansion in 2015, literally powering the rest of the world. Also, while there has been an ongoing expectation of an interest rate hike from the Federal Reserve, any such action appears to have been delayed. Hence there is reason to believe that some cyclical businesses are poised to do well.
One need not look any further than the annual reports of big truck makers to find statements about their cyclical nature. Consider Paccar (PCAR, Financial), a currently healthy company worth $20+ billion that witnessed cratering earnings during the recession as demand for diesel-powered rigs dropped off. One of its competitors that has struggled through recent years with company-specific problems, is Navistar International Corp (NAV, Financial). While Paccar has considerable European business, Navistar has next to no exposure.
It is 50% owned by well-known investors after they, not surprisingly, recently added to their stakes. Carl Icahn (Trades, Portfolio) owns the biggest position, Mario Gabelli (Trades, Portfolio) has over 10%, and Icahn protégé Dr. Mark Rachesky controls a stake valued somewhere between the other two. The activists have placed their own personnel on Navistar’s Board of Directors, and Rachesky himself serves as one of them. Typically it takes years for Icahn’s presence to yield its substantial benefits, and he has been with NAV since 2011. A consideration is that as long as considerable percentages of stock are locked up – as seems likely – it helps investors, but half of the shares being liquidated would amount to significant pressure.
So, what we have with Navistar is a producer of trucks for the domestic market at a time when fuel prices have plunged and the business cycle could boom. Current data shows truck sales are surging. However, its struggles through recent years with emissions problems and warranty expense have been serious enough to depress the share price and raise concern about solvency. Gurufocus currently shows four severe warning signs.
Pursuant to an event for analysts earlier this month, large banks have issued notes on the firm. Few are positive. Some base their valuation on solid bottom line earnings in 2016 discounted back to the current year, as Navistar is still reporting losses. (PCAR trades at under 15x forward earnings). Commentary from three analysts, each with a different rating, follows:
JPMorgan (JPM, Financial) has recently downgraded the stock to Underweight with a $28 price target. “While we are encouraged by management’s efforts to-date, we can no longer recommend the stock as lower share in a market that may be approaching peak elevates the financial risks in our view.”
UBS Group (UBS, Financial), Switzerland’s largest bank, maintains a Neutral rating and $32 target. “While 2015 profitability will be largely 2H weighted, there appears to be support for several elements of the 8-10% margin guidance in 2015 (anecdotes of medium duty share recovery/good Q1 orders, material savings and structural cost take outs). We think recovery of share in heavy duty truck will be more challenging…”
Jefferies has a Buy rating and $42 price target. “While it has become clear market share will require a prolonged effort, management has identified numerous cost initiatives to drive margin improvement in the near term…NAV remains a 'show me' story, but one in which we expect to see steady quarter to quarter progress through FY15.”
Navistar has negligible European business and there is not obvious concern about the strong dollar. However, while competitor prospects can be dampened, Navistar’s lost market share is widely concerning. Thus, while the stock could do well over the long term, it might require convincing data to light a fire under it.
