Following a deal with the management of Navistar International Corp (NYSE:NAV) that allows both him and fellow activist investor Mark Rachesky of MHR Fund Management to control up to 20% of the company each, billionaire Carl Icahn has reported a total of over 13 million shares of the stock in his portfolio. Following these most recent purchases Icahn is nearing 17% of the vehicle and vehicle parts company, and he may well continue buying close to the 20% threshold (see Icahn’s stock picks). Icahn will also, under the terms of the agreement, be able to nominate two members of Navistar International Corp (NYSE:NAV)’s Board of Directors.
Navistar International Corp (NYSE:NAV) recently had its new engine design fall short of federal environmental regulations, which has been disastrous for business in the short term. Operating losses in the truck and engine segments have offset growth in parts, and in the first six months of the current fiscal year (which ends in October) Navistar International Corp (NYSE:NAV) has lost $5.82 per share in continuing operations with additional losses in discontinued operations. Cash flow from operations was negative as well, and with the company engaged in significant capital expenditures and purchases of equipment it used nearly $600 million in cash. Navistar International Corp (NYSE:NAV) reported $1.2 billion in cash and marketable securities on its balance sheet; the remainder of its current assets are roughly in balance with its current liabilities. Wall Street analyst expectations for the forward fiscal year imply a forward P/E of 19. Given the company’s troubles, many market players have decided that it is overvalued even given activist involvement and so 24% of the float is held short.
The closest peers for Navistar include Oshkosh Corporation (NYSE:OSK), which Icahn had previously wanted to merge with the company, and PACCAR Inc (NASDAQ:PCAR).
Oshkosh trades at 13 times trailing earnings, with the sell-side somewhat bullish on the business’s future prospects; as a result, the five-year PEG ratio is 0.8. Its stock price has more than doubled in the last year, though while earnings have been doing well the company’s reports show a flatter performance in terms of revenue. Paccar recorded an 18% decline in sales in the first quarter of 2013 versus a year earlier, and net income dropped by 28%. Given this performance, and the fact that the forward P/E is 16 even with analysts projecting a recovery in the financials next year (which we wouldn’t want to depend on) we would avoid the stock.
Navistar can also be compared to Hyster-Yale Materials Handling Inc (NYSE:HY) and Wabash National Corporation (NYSE:WNC). These stocks are priced at considerable discounts to the other three companies we’ve discussed, with forward earnings multiples in the 10-11 range. With each of these companies experiencing double-digit earnings growth in their most recent quarterly report compared to the same period in the previous fiscal year, they might be more interesting prospects from a value perspective.
We’ll certainly keep an eye on Icahn’s (and Rachesky’s) activities in Navistar, but at least for now the company is still highly dependent on turning around its business. While Wall Street analysts are optimistic about its ability to earn profits next year, the earnings they are forecasting are still too low to justify the current valuation and so Navistar would have to grow beyond that point. As a result we wouldn’t be interested in buying right now.
Disclosure: I own no shares of any stocks mentioned in this article.
