Navistar International (NAV, Financial) is making significant improvements. All of its financial metrics such as EBITDA, net income and cash flow have taken a positive turn. In fact, this was eight consecutive quarters where its cash flow was positive. Also, its cost reducing plans and restructuring plans look good and should drive long-term growth for Navistar. Therefore, the investors should avoid the short-term gains and look for the long-term growth prospects that look quite appealing for Navistar going forward.
The truck market looks good
Navistar should benefit from the good looking truck market. The class 8 truck market is expected to grow at an impressive growth rate going forward. According a report , FTR has recently released the initial data for Class 8 trucks in North America that reflects 45,795 units of net orders for Class 8 trucks in October 2014. This represents highest order month for fiscal 2014 with order increases of 87% month-over-month and 76% year-on-year.
Further the report illustrates that these strong orders for trucks will be built and delivered in 2015 and that underscores the economic confidence of the companies placing the orders. After two strong quarters of freight demand and higher rates, motor carriers are beginning to add capacity.
Navistar looks great to maximize this opportunity. It projects the class 6-8 truck and bus market to attain approximately 330,000 to 340,000 units for fiscal 2014. It has successfully launched its SCR products, which are longest in class 8 category on highway. The company expects these SCR products to drive its growth along with the ISX engine and with the Maxxforce 13 SCR.
Strategic initiatives
Navistar is taking various strategic initiatives to reach this target. It is ramping up production for its SCR products which are gaining traction in the markets. It has comparatively a better line up for its SCR products in class 6-8 trucks and buses. Also, the improved quality of its new SCR engines is resulting in less maintenance requirements. These trends in the markets are driving its production, quoting levels and in order backlog. Further, it is improving its repair practices that should further bring down costs of each repair and reduce its product warranty.
In addition, the company expects the deployment of a new remote diagnostics product and OnCommand Connection will also decrease its warranty costs. There are approximately 50,000 vehicles across 75 customers that are supported by its OnCommand Connection. These improving indicators along with the strong driver acceptance of its new trucks should enhance its top and bottom line results in the fourth-quarter.
Meanwhile, Navistar plans to introduce new products with additional applications and variations that should drive its growth in fiscal 2015. Also, it is witnessing strong demand for its spare parts business in the North America. Navistar has additionally launched Diamond Renewed Program that should help creating interest in the marketplace. In fact, the company is raising bar by providing its used truck customers, with a new truck experience. Navistar plans to continue these initiatives in the fourth-quarter and into 2015 that should help the company to expand its margins and drive growth.
Apart from these growing trends, the company is executing various other growth initiatives such as structural cost savings. Its manufacturing and consolidation efforts along with adoption of lean practices are delivering good amount to the company. This strategic move resulted approximately $300 million in savings. Further, the company expect this initiative of manufacturing cost savings to deliver about $50 million to $60 million during the fourth-quarter.
Final words and valuation
Navistar International looks pretty good with these market trends and innovative products in Class 8 markets. The analysts expect its earnings to grow at CAGR of 9.00% for the next five years. This indicates reasonable growth for the stock in the long-run. However, their short-term growths are even more appealing. Its earnings will grow 125.90% this year and 99.00% by next year respectively.
The stock trades at the forward P/E of 7.39 and carries PEG ratio of 1.63. This highlights a lot of growth expansion for the stock in the future. Its balance sheet carries total cash of $1.10 billion and total debt of $5.20 billion.
