Navistar International (NAV, Financial) significantly reduced its losses during the fourth quarter but failed to match the street expectations. As a result, the stock reported a sharp decline in prices and is currently trading near its 52-week low range. Navistar is one of the largest truck producers in the U.S; however, it had been facing some challenges since 2012 on account of its new emission treatment technology. The company had been experimenting with an emissions-treatment technology, which was quite different from the ones used in the industry.
But this new technology was a failure as it could not comply with the strict federal standards for diesel-engine exhaust . Things got better as it switched to exhaust-treatment components manufactured by Cummins. For the quarter, the company managed to reduce its losses to 88 cents a share from a loss of $1.91 per share last year, while its revenue rose 9.3% to $3.01 billion (YoY). The numbers were mainly driven by increase in sales along with a lower warranty cost.
Improvements in the cards
Navistar continued to improve its result through the quarter along with improvement in its products. Consequently its warranty spends reduced significantly on account of better repair practices and newer engines with enhanced quality. Additionally, in a bid to further bolster its cost efficiency, the truck maker has decided to close its Indianapolis foundry where it used to produce engine blocks and heads. Apart from reducing its engine cost and improving the overall manufacturing capacity utilization, this closure will free up additional resources, which could be utilized in its core North America Truck and Parts businesses. In fact, it is a strategic initiative to curb its non-core operations, even as it persists to make the company profitable.
On the international front, its Brazilian subsidiary MWM was a drag on its fourth result and the management in South America is restructuring the business to reduce costs and resize its operations. On the other hand in China, Navistar is progressing well with Anhui Jianghuai Automobile Co. Ltd. (JAC), which is its engine joint venture in the region. During the quarter it began production at its new state-of-the-art facility in Hefei, bringing clean energy technology to China with higher fuel efficiency. It will help Navistar to increase its reach in China and strengthen its top line in the coming years.
Going forward, the company is counting on its enhanced fuel economy engines of class 8 trucks, which reached the highest volume in 2014 since 2006. This is backed by modest expansion in consumer goods spending and steady gains in the construction space. In addition, the company has started taking orders for the propane version of the CE Series school bus, which is specifically engineered to run on propane without sacrificing the power, performance or durability. Although, fuel prices are declining in the current market but Navistar’s venture into alternative fuels will prove to be profitable for the company in the long run.
Conclusion
With its cost saving efforts the company expects to generate an annual operating savings of $13 million, which will add to its financials in the days ahead. Currently it does not have a trailing P/E but its forward P/E looks impressive at 9.48, reflecting significant improvement in its earnings. Although the stock has sunk near to its 52-week low range but its future prospects seem good. Therefore in the light of these factors investors can consider adding this stock to their portfolio.