When a 57% Dip or Rock Bottom P/E Doesn't Mean a Buy
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If I come across a stock that has shed 57% in a year, is more than 50% off its 52-week lows, is trading at a paltry P/E of 1.5 times and is a company that has a great business line, I’d usually put on my research shoes and try to dig a golden opportunity out of it. This time, I have a stock that’s as cheap but doesn’t excite me.
When Navistar International (NYSE: NAV) announced Friday it will incorporate the selective catalytic reduction, or SCR (a technology it had sidelined so far but was being used by every other player in the industry) to address emission issues, it had done the inevitable. Accept failure of its plans in a silent way, that is.
Tough luck
All this time, the truck maker was bent on proving its exhaust-gas recirculation (EGR) capable enough of meeting the U.S. Environmental Protection Agency's standards. By doing so, it wanted to save costs, as EGR is a relatively cheaper technology compared to SCR. The end result? Navistar’s is paying a heavy price for its confidence (or over confidence).
Given that the company was struggling to obtain EPA certification for nearly two years, this announcement should come as a breather for many. Sadly, doubts are way too many to enthuse me.
First, switching to a new technology will be a costly affair—terrible news for a company struggling to boost its profits. Second, its SCR engines will again have to go through the time-consuming process of getting regulatory approval. Though management says its 13-liter SCR engines will be ready for the market in early 2013, these words come from the same management that has given us enough instances to doubt its planning and forecasting capabilities.
Gone wrong too many times
So confident was Navistar about its EGR technology that it was expecting production of EPA-certified engines to begin by June. In July, the company has given up on its technology altogether.
On similar lines, after surging warranty claims had dragged its first-quarter bottom line into the red, Navistar pacified investors by saying it was the end of warranty woes. But the following quarter suffered heavy claims again.
After all this, how many can be truly hopeful of Navistar’s SCR predictions? At least not me.
Better options out there
So while Navistar struggles to get a proven technology in place, its competitors are lunging forward. Cummins (NYSE: CMI) and PACCAR (NASDAQ: PCAR) both reported solid results in their last quarters. While surging warranty claims ate into Navistar’s bottom line, Cummins' warranty costs touched a 15-year low last year. Both companies worked hard to get their 2010 engines meet compliance—one came out victorious while the other faltered.
PACCAR’s rapidly rising sales in important segments like the heavy-duty Class 8 truck is enough to give Navistar sleepless nights. One look at the table below which shows the % rise in Class 8 truck sales reported by both companies in the past three months will give you an idea.
|
Brand Name |
% rise in unit sales from comparable month last year |
||
|
May |
April |
March |
|
|
Navistar International |
26.7% |
19.2% |
27.3% |
|
Paccar Peterbilt |
33.4% |
41.2% |
74% |
|
Paccar Kenworth |
36.7% |
53.9% |
59% |
The numbers speak for themselves. To top it off, PACCAR is stepping on the gas by announcing plans to fit its trucks with the new heavy duty ISX12 G engines made by Cummins in collaboration with Westport Innovations (NASDAQ: WPRT). Westport, on its part, is closing on huge deals and adding some of the biggest names as partners without wasting much time while Navistar sulks.
Ironically, Navistar too recently jumped on to the Cummins-Westport bandwagon by announcing intentions to use their natural gas engines for its new trucks. The question on everyone’s mind is-- why can’t Navistar just plain opt for Cummins’ proven engines instead of trying to develop its own? I am sure Mr. Market will like the idea, as was proved when Navistar’s shares posted double-digit gains on June 29 on rumors that it might soon start offering Cummins’ engines with its trucks.
Foolish final thoughts
If dipping sales and product-related issues weren’t enough, Navistar scores pretty low even from a financial standpoint with nearly $3.5 billion of long-term debt, but negative equity and cash flows and petty operating margins for support.
Navistar excited me some months back when it strengthened bonds with long-standing partner Caterpillar (NYSE: CAT) complete with plans of new joint ventures. But the situation now is so grim that no number of such tie-ins can be a saving grace for Navistar unless it gets its basic acts right. I am all yellow on this company. What about you? Let me know in the comments section below.
Nehams has no positions in the stocks mentioned above. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services recommend Cummins, PACCAR Inc, and Westport Innovations. 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.If you have questions about this post or the Fool’s blog network, click here for information.
