This Truck Business Could Surge on Its Turnaround

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When a top executive of a corporation resigns, the market reacts negatively most of the time. Navistar (NYSE: NAV) recently announced that its CFO, Andrew Cederoth, was leaving the company at the end of this month. Right after the news, Navistar's stock prices dropped by nearly 5.5% in after hours trading. The company's share price has experienced a significant fall since the middle of May 2013, going from more than $38 per share to only $26.60 per share.

Navistar has attracted a lot of famous investors including Carl Icahn, Mark Rachesky, and Mario Gabelli. The two activist investors, Carl Icahn and Mark Rachesky, each owns around 12 million shares which account for nearly 15% of the company. Mario Gabelli is the fourth largest shareholder, holding a 5.77% stake in Navistar. Should we buy Navistar at its current price? Let’s take a closer look.

Sluggish second quarter results

Navistar recently reported sluggish second quarter of 2013 earnings results. Its revenue dropped significantly, down from $3.26 billion in the second quarter of last year to $2.53 billion this year. The loss from continuing operations widened from $138 million, or $2.01 per share, to $353 million, or $4.39 per share. In the second quarter of 2013, only the company's Parts and Financial Services segments generated profits (of $91 million and $19 million, respectively) while the Truck and the Engine segment produced losses (of $109 million and $138 million, respectively.)

Back in September 2012, billionaire Carl Icahn expressed his concerns about the company’s board. He mentioned that in more than two years, Navistar has experienced a significant decline of 40% in its Class 8 market share (from 25% to 15%.) Moreover, in spite of the challenging market environment, Navistar’s board spent money and effort on lawsuits against various stakeholders including suppliers, competitors and regulators. When COO Troy Clarke was promoted to CEO of the company in the first quarter of this year, Icahn felt quite positive. He said that Troy could lead the company to focus on its core business, significantly reduce cost and increase the company’s market share in the North America heavy truck market in the next several years.

Ongoing business restructuring

Navistar has been trying to grow its market share again by having a $100 million investment, placing new dealers in key markets and increasing the company's service capacity by 22%. Throughout the year, the company offered new 15-liter and 13-liter products. It expected to have a market share run rate of 18% at the end of this year. By reducing costs and growing market share, Navistar targeted an 8% to 10% EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) run rate by 2015. The company is trading at around $26.60 per share, with the total market cap of $2.14 billion. The market values the company at only 18% of its trailing total sales. Because of the negative book value and negative trailing EBITDA, the price-to-book ratio and EBITDA multiple are not valid.

The smallest and the cheapest company

Compared to its peers including BAE Systems (NASDAQOTH: BAESY.PK) and PACCAR (NASDAQ: PCAR), Navistar is the smallest company and has the lowest price-to-sales multiple.

BAE Systems is trading at around $23.90 per share, with a total market cap of $19.40 billion. The market values BAE Systems at 0.73 times its sales and 5.9 times its trailing EBITDA. BAE Systems is considered a global defense, aerospace and security company, operating in several business segments including Electronic Systems, Cyber & Intelligence and Platforms & Services. What I like about BAE Systems is its share buyback plan initiation. In the next three years, BAE Systems intends to buy back up to £1 ($1.54) billion worth of stock. BAE Systems reported that as of May 7th, the company has already repurchased 17 million shares with the total cost of £65 ($100.2) million under this program. The total share buyback plan could yield up to 7.9% for shareholders on the current trading price.

PACCAR is trading at $51.10 per share, with a total market cap of around $18 billion. The market values PACCAR the highest among the three companies at 1.1 times its sales and 11 times its trailing EBITDA. What impresses me  is that the company’s consistent profit generation. It has had 74 consecutive years of net profit. Moreover, the company has paid uninterrupted dividends since 1941. At its current trading price, PACCAR offers investors a dividend yield at 1.5%.

Among the three companies, BAE Systems is the most profitable company with the highest return on invested capital at 13.15%. PACCAR ranked second with much lower ROIC at only 6.86%, while Navistar is currently generating losses, with negative return.

My Foolish take

Navistar could be considered an opportunistic play on the company’s turnaround. With the cheapest price-to-sales ratio, the ongoing business restructuring and the urge of two activist investors, Navistar could surge dramatically when its business performance begins to improve.

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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!

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