Tickers in this Article: NAV, PCAR, VOVLY.PK, CMI, OSK, ETN, KNX, ODFL, SWFT, WERN
This has been a tough year for companies with high exposure to the heavy-duty truck industry. Navistar (NYSE:NAV) has long had its own issues, though, including a messy balance sheet, problems with its new engine, and a generalized difficulty in producing strong economic returns. Although the company's shares are undervalued relative to what it could accomplish, management has a lot yet to prove.

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Mixed Results to Close the Year
Navistar missed analyst expectations on the top line, but not by a large amount. Overall growth of 28% wasn't bad, with operating revenue (excluding financing revenue) up 29%. Performance was pushed by 36% growth in trucks, while parts revenue rose 16% and engine revenue rose almost 9% on a 14% increase in shipments. Military revenue rose 36% this quarter and made up close to 20% of the quarter's revenue.

Navistar had a fairly typically messy quarter, but within that profitability progressed. Gross margin rose about three points from last year, while reported operating income rose 130% and segment profits grew almost 200%. Profit improvements were strong in both the truck (up over 233%) and engine (up over 400%) segments, while parts profits were up about 13% from last year. (For related reading, see A Look At Corporate Profit Margins.)

Will Its Own Engines Power Better Share?
Although Navistar management took the opportunity in its quarterly presentation to brag a bit about its position in markets like buses, medium trucks and severe service trucks, that's only part of the story. Another part is ongoing share losses and aggressive competition from the likes of PACCAR (Nasdaq:PCAR), Volvo (OTCBB:VOLVY), Daimler and Cummins (NYSE:CMI). The chatter on Navistar's MaxxForce engine isn't quite as negative as it was about six months ago, but it is hard to say if that's because of actual improvements or the complainers moving on to fresher subjects.

Mixed Outlook on 2012 Spending
A curious dichotomy is showing up in the outlook for spending next year. On one hand, the manufacturers of trucks, engines and parts have all been fairly positive on builds and orders next year. On the flip side, large truckers like Knight (NYSE:KNX), Swift (Nasdaq:SWFT) and Werner (Nasdaq:WERN) have been less enthusiastic.

It's certainly true that the truck market is a big one, and a few lower capex revisions may mean little. There is, for example, plenty of room for growth in markets like China, India or Brazil, not to mention other truckers like Old Dominion (Nasdaq:ODFL).

Will Icahn be a Distraction or an Agent of Change?
Navistar has plenty of challenges already on its plate in addressing concerns about the MaxxForce, dealing with what will likely be lower future defense budgets, and improving its profitability and operating efficiency. Having well-known activist investor Carl Icahn holding a large slug of stock is certainly not something that management can or will just ignore. Likewise, there are rumors about a possible combination with Oshkosh (NYSE:OSK) to consider.

The Oshkosh deal will either happen or it won't - the company's balance sheet would seem to preclude anything but a stock deal. While the combination makes a certain amount of sense on an operating basis, there are questions of affordability and whether the shareholders of an underperforming company will want the shares of another underperforming company.

As for Icahn, that could be a more challenging subject. Icahn is big on sweeping gestures like mergers, divestitures and large capital returns. He's not so famous for spurring dramatic internal operating improvements or market share growth. (For related reading, see Carl Icahn's Investing Strategy.)

The Bottom Line
Heavy truck companies have had a tough year in 2011. PACCAR may be a better company, but its stock performances have been similar. Cummins and Eaton (NYSE:ETN) have fared better, and those are frankly the better options for investors looking for companies that already run themselves well.

For Navistar, it's all about whether management can stem the share erosion and drive better cash flow production. If so, the shares are dramatically undervalued, but little suggests that the company can get there based on past performance.

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

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