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Lalitsharma
Lalitsharma
Articles (342) 

Hotchkis & Wiley Keeps Buying Navistar

May 22, 2015 | About:

Since its inception in Los Angeles in 1980, Hotchkis & Wiley (Trade, Portfolio) has focused exclusively on finding and owning undervalued companies that have a significant potential for appreciation. Hotchkis & Wiley are value investors focusing on important investment parameters such as a company's tangible assets, sustainable cash flow, and potential for improving business performance.

Last quarter, Hotchkis & Wiley increased its position in Navistar (NYSE:NAV) by buying 1,305,300 shares. In the previous quarters also, the investment firm was seen buying Navistar's shares. The following chart shows its holding history in the company.

Navistar International Corporation, incorporated under the laws of the Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. and Navistar Financial Corporation. The company is an international manufacturer of International® brand commercial and military trucks, MaxxForce® brand diesel engines, IC Bus™ brand school and commercial buses, as well as a provider of service parts for trucks and diesel engines. The company also provides retail, wholesale and lease financing services for its trucks and parts.

Navistar’s core business is the North American truck and parts markets, where it participates primarily in the Class 6 through 8 vehicle market segments. Historically, the company had success in the truck and bus markets due to the integration of its engines in these vehicles. In 2009, the company expanded its engine offering to include certain heavy-duty big-bore engines under the MaxxForce brand. At that time, management believed that vertically integrating its engines and trucks in certain markets would be the best method to differentiate Navistar’s products, create value and provide an expanded stream of revenue for service parts over the life cycle of the vehicle. As a part of this strategy, the company focused on its proprietary Exhaust Gas Recirculation (EGR) technology in its engine which management believed would eliminate the need for additional after-treatment components on Navistar’s vehicles, including urea-based Selective Catalytic Reduction ("SCR").

However, this strategy didn’t work, and in July 2012, the company announced a change to its engine emissions strategy. Navistar aggressively pursued the technology path followed by others in the industry by adding SCR components to its engines and vehicles, and as a result, in 2013, it received U.S. Environmental Protection Agency ("EPA") certification of certain of its MaxxForce engines that incorporate an SCR after-treatment system. In addition to modifying its technology path related to emissions standards, the company decided to discontinue the development of certain engines which lack scale, in favor of a more cost-effective method of purchasing certain engines from an engine OEM supplier.

This transition included significant restructuring charges and leadership changes, and the company’s financials suffered for the last couple of years. However, things are changing now and the company’s core operations are improving. Last year, Navistar had a number of notable accomplishments, which included growing revenue each consecutive quarter of the year, lowering its break-even point by reducing structural costs and warranty expense, effectively managing its cash balances and extending its debt maturity profile.

Going forward, the macro environment remains supportive of the turnaround, and the industry volumes remain impressive. In 2014, Class 8 volumes reached the highest levels since 2006. Improved new truck fuel economy, combined with rising tonnage and improving transportation companies’ profitability, contributed to higher demand for Class 8 trucks. Modest expansion in consumer goods spending and steady gains in construction point to favorable growth conditions in the medium truck market as well.

Rebuilding sales and market share continues to be one of the company’s highest priority and the company remains focused on providing its customers uptime, fuel economy, weight, driver satisfaction and the right products. Management believes these actions will drive higher volume and market share. The company remains on track to achieve its EBITDA margin target of 8% to 10% exiting 2015.

Navistar is trading at 9.19 times FY2016 EPS. This is a significant discount to its peer Paccar (NASDAQ:PCAR), which is trading at 14x P/E. On a Price/ Sales basis, the discount is even wider with the company trading at 0.22x P/S versus Paccar’s P/S of 1.20. Clearly, there is substantial upside possible if the company’s turnaround is successful. The fourth quarter of 2014 was the first one in many years when the company posted a positive adjusted EPS. I believe things are going to improve for the company as its turnaround takes a hold. Hence, I am bullish on the stock.

About the author:

Lalitsharma
Growth at reasonable price (GARP) investor.

Rating: 0.0/5 (0 votes)

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