Should We Follow Icahn Into This Loss Making Truck Maker?
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Editor's Note: This version has been updated to clarify Navistar's incorporation date.
Navistar’s (NYSE: NAV) share price has been extremely volatile for the past four years. The company’s share price has risen from $22.90 in Mar. 2009 to $69.50 in Apr. 2011, and then it plunged to only $19 in Oct. 2012. Afterwards, Navistar climbed up significantly to more than $35.40 per share.
Interestingly, two big activist investors, who have been building their stakes in the company, are Carl Icahn and Mark Rachesky. Each of them owns around 12 million shares in the company. Let’s take a closer look to see whether we should follow Icahn and Rachesky into Navistar.
Business snapshot
Navistar is a global maker of trucks, buses and recreational vehicles under several brands such as International, IC Bus, Maxx Force and Monaco RV, operating in four main business segments: Truck, Engine, Parts and Financial Services. The majority of its revenue, $9 billion, or 69.5% of the total 2012 revenue, was generated from the Truck segment. The Engine segment ranked second, with nearly $3.4 billion in revenue in 2012 while the Parts segment contributed around $2.12 billion in revenue. The Financial Services segment generated only $259 million in 2012 revenue. However, only the Parts segment and the Financial Services segment generated operating profits of $240 million and $91 million, respectively. The Truck and Engine segment incurred losses of $320 million and $562 million, respectively.
Icahn was not happy with the current Board
In the letter to Navistar’s Board of Directors in Sept. 2012, Icahn has expressed his concerns about the company’s board. He wrote that in more than two years, the company’s market share had dropped by 40% (from 25% to only 15%) in the Class 8 market. The share price has decreased by 58% to below $25 per share. However, during the challenging business condition, the Board spent time and money on lawsuits against suppliers, regulators and competitors, but it did not want to spend money on a necessary “back-up plan involving the industry standard technology” that the company now must depend on.
When Navistar promoted its COO Troy Clarke to become the CEO, Icahn seems to be satisfied. He said: “We believe that Troy will be able to focus the company on its core business, execute on aggressive cost and market share targets and ultimately succeed in leading Navistar to the dominant position in the North America heavy truck market over the next several years. The company has a bright future and we are behind Troy 100% in his efforts to build Navistar into a focused, competitive and profitable truck and engine manufacturer.”
What makes me worry is a negative book value that Navistar carries on its book. As of Jan. 2013, it had $1.27 billion in cash, $4.46 billion in both long and short-term debt and a negative book value of -$3.36 billion. The negative book value was caused by negative retained earnings of nearly -$3.3 billion and accumulated other comprehensive income of -$2.27 billion.
Peer comparison
With a current trading price of around $35 per share, its total market capitalization is around $2.8 billion. The market is valuing Navistar at only 0.2 times sales. Because of the negative book value, the price-to-book ratio is not valid. Compared to its peers including BAE Systems (NASDAQOTH: BAESY.PK) and PACCAR (NASDAQ: PCAR), Navistar is a much smaller company. BAE, at a current trading price of about $22 per share, is worth nearly $18 billion on the market. The market is valuing BAE at 0.66 times sales and as high as 2.95 times book value. PACCAR is trading at nearly $50.50 per share, with a total market cap of $17.8 billion. It seems to have the most expensive valuation of 1 times sales and nearly 3 times its book value. PACCAR deserves the highest valuation, as it is the most profitable company among the three. It has the highest operating margin of 9.4% while the operating margin of BAE is 9%. As Navistar has been generating losses, it has the cheapest P/S valuation.
The Foolish bottom line
Although two famous activist investors, Carl Icahn and Mark Rachesky have been building up their position in the company, I personally don’t feel comfortable investing in Navistar at the current moment, due to the negative book value and the unprofitable operation.
Anh Hoang has no position in any stocks mentioned. The Motley Fool recommends Paccar. The Motley Fool owns shares of Paccar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
