There was absolutely no reason to think that the fiscal fourth quarter was going to be a good one for truck builder Navistar (NYSE:NAV), and it certainly was not a good one. The real question for investors, though, is whether this company can hit its new product launch targets, streamline its manufacturing process and rebuild the share that management missteps destroyed over the past couple of years. This continues to look like a binary stock to me - if management can direct a real turnaround, the shares will thrive from here, but survival (and success) are far from assured.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

Fiscal Fourth Quarter Closes out an Annus Horribilis
Few companies are likely to be as eager to put 2012 behind it as Navistar. Not only did Navistar mark still more share loss, but also an expensive and embarrassing backtrack on its proprietary engine development program.

Revenue plunged 24% this quarter, though it was relatively consistent with the fiscal third quarter even though the commercial truck market hasn't gotten any better. Manufacturing revenue fell 16%, truck revenue dived 195% and engine revenue fell 769%. Parts revenue was the only one that still produced a profit, falling only 16%, but that does very little good.

Navistar's margins are in pretty rough shape at the present. Gross margin fell from almost 20% last year to below 3% this quarter. Operating income reversed a year-ago profit of about $338 million into a loss of $380 million, as both the truck and engine business saw profitability collapse. Although the 13% decline in segment profits for the parts business is not significant in terms of its overall contribution, I find it discouraging that the one Navistar business that delivered revenue growth still saw negative operating leverage.

Investors should also note that the company took some sizable non-operating charges this quarter. A very large percentage of that was $2.2 billion in tax revaluation, but the company also continues to report warranty costs that are higher than management's prior guidance.

SEE: How To Decode A Company's Earnings Reports

Will Cummins Save the Day?
Industry orders have been getting a little better recently, mostly as commercial fleets waited until the last moment to place orders for 2012. That's really not the major driving factor for Navistar right now, though.

The bigger issue for Navistar is hitting launch targets for new 15L and 13L engines from Cummins (NYSE:CMI). Going back to Cummins engines (at least for a little while) is a big part of the company's plan to repair itself in the wake of its engine debacle, and it will be important for the company to hit these targets. With optimism building that commercial truck orders will improve in 2013, it will be important for the company not to miss out, or rivals like PACCAR (Nasdaq:PCAR) and Volvo (OTC:VOLVY) will grab more share.

Share Losses Are Ugly, but There's Still a Business Here
I've been more than happy to pound on this company for its mistakes, but the reality is that there is still a business here. Moreover, management has apparently become rational about its list of near-term "must do's," and is focused on turning Navistar back into a profitable truck manufacturer that sells reliable products to commercial buyers.

SEE: Evaluating A Company's Management

No doubt, plenty of damage has been done as the company has lost almost one-third of its market share over the last two years. On the other hand, the company still has almost half of the market for school buses and about one-third of the market for severe service and medium-duty trucks. Those are still profitable businesses and rivals like Oshkosh (NYSE:OSK) do have some challenges of their own right now. Rebuilding the Class 8 business is going to take some work, but Navistar has built share in this market in the past.

The Bottom Line
Modeling Navistar's future cash flow is definitely an exercise in guesswork. While it's not unthinkable that the company could have $15 billion or more in revenue in fiscal 2014 and hundreds of millions in free cash flow, it's also not unthinkable that launch failures, further share losses and/or an inability to return to profits could leave the company teetering on the brink. So while it's not too difficult to produce scenarios that point to $30 or more in fair value, those estimates carry a large margin of error.

Although I do believe Navistar has put the worst of its mistakes behind it, I'd prefer to play a rebound in commercial vehicles through names like Cummins, Dana (NYSE:DAN) or Allison Transmission (Nasdaq:ALSN).

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  2. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  3. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  4. Stock Analysis

    What Drives Ford's Profits? Not Just Cars

    Ford, an experienced legacy car manufacturer, sells a lot of cars around the world and makes a lot of money in the money lending and leasing business.
  5. Stock Analysis

    The 4 Technology Stocks You'll Wish You Bought in 2015

    Find out which technology stocks you wish you had bought in January 2015, including such big names as, Netflix and Electronic Arts.
  6. Stock Analysis

    Warren Buffett's Latest Bet: The Riskiest Yet?

    Warren Buffett just made the biggest — and possibly riskiest — acquisition of his career.
  7. Investing

    No Solace in Small Caps

    In the U.S., second-quarter earnings season has generally been better than expected. However, it has failed to inspire investors.
  8. Stock Analysis

    How Honeywell (HON) Makes its Money

    Honeywell is a true conglomerate in a world of ever-greater specialization. Here's how it generates revenue.
  9. Trading Strategies

    Microsoft's Game of Catch-Up With The Dow

    Microsoft (MSFT) underperformed the Dow Jones Industrial Average during the 2002 to 2007 bull market, but it has played catch-up in recent years.
  10. Fundamental Analysis

    Burger King and Tim Hortons Are Better Together

    In August 2014, 3G Capital announced that it was merging Burger King with Canadian coffee chain Tim Hortons to form Restaurant Brands International.
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Smokestack Industry

    Heavy manufacturing industries with factories that generally ...
  3. Rust Belt

    A slang term for a geographic region in the United States stretching ...
  4. Triple Play

    In investments, a stock that simultaneously beats analyst expectations ...
  5. Visibility

    The extent to which future projections are probable. Visibility ...
  1. What happens if a company's earnings fall short of estimates?

    Companies try very hard to not miss their earnings estimates, but it does happen from time to time. These missed earnings ... Read Full Answer >>
  2. How can I access a company's earnings report?

    One of the most important tools in the arsenal of the fundamental investor is the company earnings report. The earnings report ... Read Full Answer >>
  3. What is the difference between earnings and income?

    The differences between earnings and income change depending on the context. Technically speaking, personal earnings are ... Read Full Answer >>
  4. How does a share premium account appear on a balance sheet?

    A share premium account shows up in the shareholders’ equity portion of the balance sheet. The share premium account represents ... Read Full Answer >>
  5. Is an earnings surprise priced into the opening value by market makers or does the ...

    An earnings surprise is an event where the earnings of a company are greater or lower than the predictions put forth by analysts, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!