Navistar: Zero Credibility Means Buy Now
Glen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I received a message from a friend, "What's your view on investing in some NAV stock since its low?" Long story short, Navistar (NYSE: NAV) is a Buy. So, how do we get to that conclusion?
The Lay of the Land
One of the first things you'll notice is that the headlines are populated by negative financials and an activist investor, Carl Icahn, increasing his stake. Remember that his stake comes from $45+ and he only increased his stake between $21 and $25. He's underwater, but nevertheless he thinks there is value. Nevermind the headline financial negativity. In this case, I think that the drivers behind the negativity are in the past and the company is lining up a stronger 2nd half of their fiscal year. I think that going forward they'll break back into stride as they break past the barriers that have been holding them back.
Negative Assumptions Driving Valuation Models
I think that this remark from an analyst on the company's earnings call sums up market sentiment:
Stephen E. Volkmann - Jefferies & Company, Inc., Research Division
All right. Maybe just a quick follow-up for A.J. I mean at this point, I think we have to assume that I mean you guys have some, again, massive numbers in the second half. I think the credibility there is pretty close to zero.
Analysts have dropped their targets to reflect the most recent price drop. Remember, it is their job to predict the current price, not the future price. That's how they keep their job.
The Present Valuation
The company is trading roughly at the valuation that we saw back during the 2008-2009 market crisis. This begs the question, is that warranted? The first and easiest thing to do is to look at the comparables. The comparables, Cummins (NYSE: CMI), Oshkosh (NYSE: OSK) and PACCAR (NASDAQ: PCAR) all trade at a P/E greater than 8.
If you look at Navistar's most recent quarterly presentation, you'll notice that they are looking at a Full Year 2012 adjusted EPS of $4.25 - $5.25. In theory, if you throw an 8x earnings multiple on the low end, that puts the price floor at $34. But, more importantly if you look at their "Looking Forward" slides, their Normalized Adjusted EPS is $5.35-$7.50. That would put their intrinsic valuation using the same 8x multiplier at $42-$60.
1. If You Believe the Company, Buy!
So, if you go by the company's numbers, you should take a stake. The question is, "Are their numbers to be believed? I listened to their past few quarterly conference calls, but I recommend that you skim some of the language from the company and the analysts in their most recent call. The transcript can be found here.
2. If You Don't Believe the Company, the Price is OK
The company is presently at a valuation that suggests that they might not overcome their hurdles. I think that under these assumptions, the existing price is fair, but is it reasonable to believe that progress won't be made?
1 and 2 Imply That the Risk is Not Owning
Well, when the company has zero credibility, is doing a reasonable job of overcoming hurdles and actually has the capacity to put out incredible numbers, and is presently trading at a valuation at which their existing situation makes them a hair undervalued, I see the risk being not of ownership, but the lack of ownership. As such, since the greater risk is not owning, I recommend taking a stake at any price less than $30. I think that anything less than $30 is going to yield a ROI of 15%+ going forward. I think that they'll be able to realize gains on their excessive Engine Warranty accounting writedowns that have plagued their headlines and thus increased investor uncertainty. The valuation of the entire sector seems unreasonably cheap right now and I see that as a tailwind for the sector, but an especially large tailwind for Navistar.
Glen and his investors are long Navistar International