Who is Ready for the Turnaround in the Economy?

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

Transportation stocks have lost their charm among investors given these recessionary times. However, some numbers are painting a rosy picture. Leading truck indicators point to a 2013 order recovery in Latin America, China, and North America:

1)      In the US, trucker pricing has inflected to the upside in recent months, rising 3.4% yoy in December and 2.7% in November. If the pricing momentum continues into 2013 as trucker consensus estimates discount, you can expect truck orders to pick up in coming quarters.

2)      Similarly, China freight volumes have turned positive for two consecutive months for the first time in nearly two years, and the truck share of GDP is at a cyclical trough.

3)      In Brazil, a recovery in industrial production and the completion of the 1H 2012 inventory de-stock provides visibility on rising truck production rates.

In case of a revival in the trucking industry, which Original Equipment Manufacturers (OEMs) should investors buy?

Cummins (NYSE: CMI): Conservative guidance likely, but engine share gains to fuel upside

I recommend Cummins as a buy given the US truck after-treatment share gains and China engine regulations to drive over a $1 of earnings power upside relative to consensus 2014 estimates.   Also, with global truck markets at a trough and heading higher, I see an attractive cyclical risk-reward as well. The management is expected to introduce 2013 EPS guidance of $8.50, below the consensus estimates based on muted global truck and power generation market guidance. The company is expected to make an EPS of $1.75 and quarterly revenue of $4 billion. However, I believe an earnings beat is in the cards, as the company has managed a stronger-than-expected cost control.

Navistar (NYSE: NAV): Cutting unprofitable US engine products most significant opportunity

I expect a sharply wider loss in FY 2013 versus consensus, as US engine losses continue to hamper profitability. However, Navistar’s stock price can hit $26 if it is able to eliminate losses in its US Engine business and improve truck pricing, balanced by a challenging transition process and uncertain timing. However, if the US Engine losses remain, the price can come down to $9 (61% downside from current levels). In this context, the success of Navistar’s engines treated by Cummins (to make them compliant to environmental authorities) will be of prime importance to Navistar.

Westport Innovations (NASDAQ: WPRT): Downside to consensus on delay in production ramp for key new engine

While I see modest upside to consensus EPS in 4Q 2012, I believe investors will focus on timing of production ramp for the key 12L Cummins Westport engine product. I see downside risk to 2013 consensus expectations, as the timing of the production ramp of the CWI 12L engine is likely mid-3Q13 versus expectations of end of 1Q13, based on recent commentary made by the joint venture management. While I remain positive of the long-term penetration opportunity of natural gas engines in truck and high horsepower applications, I am short on the stock because:

1) The Cummins JV that accounts for nearly all WPRT medium-term profits is scheduled to terminate in 2021, with a buyout option at 1.3x EBIT in 2019,

(2) High distribution support requirements limit normalized profitability for the Heavy Duty business, and

(3) Low-cost natural gas engine alternatives offer a compelling value proposition.

Conclusion

The key here is to understand that the North American economy might be at an inflection point. Unfortunately, if companies like Navistar and Westport don’t get their product to the market on time, they will not be able to capitalize on this potential surge in demand. 


SuperbAnalyst has no position in any stocks mentioned. The Motley Fool recommends Cummins and Westport Innovations. The Motley Fool owns shares of Cummins 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus