| 2007 | 2008 | ||||||
| Price: | 55.00 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 3,900 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
Sign up for free guest access to view investment idea with a 45 days delay.
Navistar International (“NAVZ”), a manufacturer of medium and heavy trucks, is a special situation opportunity that trades at a material and unwarranted discount to its peer group. The Company is on track with respect to its strategic initiatives and is well on its way to improving its global sourcing footprint as it continues to diversify its revenue base away from its more traditional and cyclical trucking segments.
At the current price of approximately $55/share NAVZ trades at 7.3x our 2009 EPS forecast of $7.50 or a 22% discount to its peers, which trade at a 2009 P/E of 9.4x. Based on Management’s recently reaffirmed 2009 guidance of ~$10.80 EPS, NAVZ is trading at 5.1x 2009 P/E, or a 46% discount to its peers.
The valuation discount is, in our view, a direct result of a material financial restatement which the Company is currently in the final stages of completing (2003-2005 financials were restated in December 2007 and current audited financials will likely be filed in spring of 2008). In April 2006 (when the stock was trading in the mid-$20s), NAVZ announced that all financial statements from 2002 through 2005 require restating. Simultaneously, the Company dismissed Deloitte & Touche, and hired KPMG as its auditor. As a result of these accounting issues, the NYSE delisted the Company’s shares and the stock was subsequently removed from a number of indices including the S&P 500.
In the absence of current financials, the market is taking a guarded approach to Management and remains unconvinced of their 2009 guidance. However, as we will discuss in further detail, our bottom-up approach provides a 30% haircut to 2009 Company-issued guidance and still provides for material upside for the stock if NAVZ were to trade inline with its peer group. Furthermore, we believe the market is overly-pessimistic with respect to a return of the trucking market beginning in late 2008 through 2009 largely due to the government-mandated emissions regulation change which will go into effect in 2010. The market also under-appreciates the importance of recent orders for NAVZ’s mine-resistant ambush protected (MRAP) vehicles from the US military. Furthermore, the potential for joint light tactical vehicle (JLTV) orders (resulting from the BAE Systems JV) has largely gone unnoticed. With the final restatement set for spring 2008 and subsequent re-listing to the NYSE, we are confident that investors will refocus on NAVZ leading to the eventually elimination of its valuation discount.
Description
NAVZ operates in four segments: truck, engine, parts and financial services:
Truck Segment - manufactures and distributes class 6 through 8 trucks and buses. The Company competes primarily in the class 6 through 8 bus, medium and heavy truck markets within North America and focuses on growth in expansion markets which include Mexico, emerging markets, military and recreational vehicles. Most of NAVZ’s trucks are distributed through a network of 841 U.S. and Canadian dealer and retail outlets and 81 Mexican dealer locations.
Engine Segment - designs and manufactures diesel engines for use primarily in NAVZ class 6/7 medium trucks, buses, and some class 8 heavy truck models. NAVZ also resells engines to other OEMs in the U.S., Mexico, and Brazil. Diesel engines are sold under the MaxxForce brand and also produced for other OEMs, principally Ford. NAVZ has a 46% share of the diesel pickup engine market in the U.S. and Canada, and approximately a 40% share of the engine market for medium-duty commercial trucks and buses in the U.S. and Canada.
Parts Segment - provides parts and supplies to support trucks, buses and engine.
Financial Services Segment - provides retail, wholesale, and lease financing of products sold by the truck segment and its dealers within the U.S. and Mexico. This segment also factors Ford receivables from the engine segment, wholesale accounts, and selected retail accounts receivable. Foreign finance subsidiaries primary provide wholesale, retail, and lease financing to the Mexican operations’ dealers and retail customers. This segment provided wholesale financing in 2005 (most recent audited information) for 96% of the new truck inventory sold by NAVZ to dealers and distributors in the U.S. and provided retail and lease financing for 15% of all new truck units sold or leased by NAVZ to retail customers.
A Note on Ford
It’s important to note that NAVZ supplies V-8 diesel engine to Ford for use in all of Ford’s diesel-powered super-duty trucks and some vans. Shipments to Ford during the year ended October 31, 2005 account for 95% of all V-8 shipments and 68% of total shipments (including inter-company transactions.)
NAVZ is currently involved in litigation with Ford and will likely lose the Ford business in the coming years. Fortunately, in December NAVZ announced a non-binding MOU under which NAVZ agreed to purchase certain assets, intellectual property and distribution rights for GM’s medium-duty truck business. This is a logical deal for NAVZ which will help the Company achieve its revenue targets without the Ford business. Longer-term, the GM business may also provide a larger opportunity for NAVZ with respect to GM’s larger truck engine business.
Company Guidance and Strategic Direction
In recent months, Management has guided investors towards a 2009 revenue target of $15 billion with segment margins (EBIT margin before corporate overhead) of $1.5 billion. NAVZ has outlined a plan to achieve these targets by first, focusing on improving its cost structure through increased global sourcing and strategic partnerships (domestic and international) and second, by reducing cyclicality and diversifying its revenue mix by focusing on non-traditional markets such as the military and aftermarket parts businesses.
Since 2004, the Company has executed a number of international JVs and acquisitions designed to improve its product offerings and cost structure. These include: (1) a JV with MAN AG to develop the big-bore diesel engine in the 11 and 13 liter class; (2) the acquisition of MWM, a Brazilian diesel engine producer; (3) the acquisition of WCC, a manufacturer of chassis; and (4) a joint venture with Mahindra & Mahindra, an Indian manufacturer of multi-utility vehicles and tractors.
Another interesting sub segment of note is NAVZ’s military and government business. In 2007, NAVZ was awarded combined orders worth over $2.7 billion to provide ~4,500 MRAP vehicles to the U.S. military. Originally, NAVZ was considered the underdog while bidding on this business and has since emerged as the largest recipient of new orders to-date. Most recently, NAVZ was awarded a 47% share of the military’s MRAP order further highlighting their position in this market.
Valuation
Management’s 2009 guidance of $15B in revenue and $1.6Bn of segment margin (recently increased by $0.1Bn) appear aggressive based on historical operating margins and are somewhat difficult to validate given the lack of current audited financials. As such, we evaluated each one of NAVZ’s business segments from a bottom-up perspective to gain comfort with respect to the Company’s true earnings power.
First, from a top-line perspective, we believe the $15Bn revenue goal by 2009 is feasible when using a set of reasonable operating assumptions, one of which is robust growth in class 6-8 commercial vehicles beginning in late 2008 through 2009 driven by a strong pre-buy ahead of the 2010 emissions changes, similar to the dynamic we saw in 2006.
Second, based on profitability levels for other industry participants and extensive primary research based on data provided from a variety of industry executives, the following 2009 segment operating margins appear achievable: bus 7.0%-9.0%; medium truck 5.5%-6.5%; heavy truck 4.5%-5.5%; severe service 5.5%-6.5%; military 10%+; parts 15% and OEM engine 5.0%-6.0%. The mid-point of our profitability range provides us with a blended segment margin of 7.4% or $1.2Bn, based on $15Bn in 2009 sales. Segment margins less corporate overhead, projected interest expensed and taxes result in net income of approximately $580mm or $7.50/share (based on a fully diluted share count of 77.4mm.)
On a 2009 basis, our peer group universe trades at an average multiple of 9.4x EPS which would result in a price target of $71 or ~30% upside from current levels.
It is important to note that using the same methodology, management's 10% segment margins guidance (which is in-line with industry competitors) would result in 2009 EPS of ~$10.80. Given the lack of current financials, it’s difficult to accurately account for the variance between our $7.50 EPS estimate and Management’s more aggressive guidance. If management’s guidance is correct, upon refiling current financial statements, NAVZ should revert to trading in line with its peer group at a multiple of 9.4x 2009 EPS, implying a $100 target on the stock. Given the lack of information, we choose to be more cautious in our approach. Relying on our operating assumptions, we are satisfied with 30% upside and take comfort in the additional margin of safety that management’s guidance provides.
Recent Events
Upcoming Catalysts:
| show sort by |
Are you sure you want to close this position Navistar Investment Thesis?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea Navistar Investment Thesis for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".