Print
Hits: 3435

Navistar came up with its 3Q2008 earnings release yesterday reporting net income of $272 mn as compared to a loss of $4 mn in 3Q2007. This was powered by improved pricing and higher contribution from military segment as contribution from military segment increased to $1.2 billion in 3Q2008 versus only $59 million in 3Q2007.

Navistar’s earning came as a surprise to the investor community surpassing analyst and our EPS expectations of $1.42 and $0.93, respectively. Following its robust reported 3Q2008 earnings, Navistar raised its full year 2008 guidance nearly 50% or $2 per share to between $6.35 and $7.45.  It actually seems that the robust results left the company itself by surprise which had recently one month ago, in August 2008, had issued FY2008 EPS guidance between $4.26 and $5.72.  Navistar’s timing of muted guidance in August 2008 with only 1 month away from 3Q2008 results raises serious questions about the company management’s precision and confidence on their own numbers - or possibly something a little less benevolent. Since I don't want to jump to conclusions and to be as fair as possible we will wait for the conference call and do a little more digging.

We have carried out variance analysis between our expected results and a summary of financial highlights for Navistar (please refer to the previous post – 3Q2008 result analysis).  The primary reason for difference between our expected earnings and Navistar’s earnings was due to higher than expected pricing improvement. We expected Navistar’s revenues to increase by 23% while the company reported revenue growth of 34%. This was primarily due to higher-than-expected improvement on the pricing front.

We expected Navistar’s unit pricing in the truck segment to increase 42% y-o-y but due to higher than expected contribution from military segment and launch of new products like ProStar resulted in a 55% y-o-y increase in unit price of truck.  (Excluding the price impact there was a 1% variation in reported and actual revenues). On the volume front, we expected Navistar’s truck shipments to increase 5% y-o-y while we expected engine shipments to decrease 24%. In line with our expectations, Navistar’s truck shipments increased 10% (~ due to higher than expected contribution from military) and engine shipments decreased 27%.

Navistar’s net sales increased 34% to $4.0 bn in 3Q2008 as against $3.0 bn in 3Q2007. However it is interesting to note that Navistar’s sales excl U.S. military sales declined 4%. We will look forward to Navistar’s conference call today to gauge the sustainability of revenues from military segment going forward.  We shall update the financial model in light of 3Q2008 results and company’s conference call.

VARIANCE ANALYSIS

3Q-2007

 

3Q-2008

Change

 

Variance analysis

 

Actual

Estimates

%

Absolute

         

Sales and revenues

                     

Sales of manufactured products, net

                2,852

 

              3,879

            3,536

10%

               343

         

Finance revenues

                   104

 

                   75

                 94

-20%

                (19)

         

Sales and revenues, net

                2,956

 

              3,954

            3,629

9%

               325

         
 

                      -  

                   

Costs of products sold

                2,428

 

              3,115

            2,968

5%

               147

         

Selling, general and administrative expenses

                   368

 

                 386

               380

2%

                   6

         

Engineering and product development costs

                     86

 

                 108

               102

6%

                   6

         

Interest expense

                   125

 

                   88

               102

-13%

                (14)

         

Other (income) expenses, net

                    (34)

 

                    (5)

                  -  

 

                  (5)

         

Total costs and expenses

                2,973

 

              3,692

            3,551

4%

               141

         
                       

Equity in income of non-consolidated affiliates

                     22

 

                   18

                 20

-9%

                  (2)

         

Income (loss) before income tax

                       5

 

                 280

                 98

187%

               182

         

Income tax benefit (expense)

                      (9)

 

                    (8)

                (29)

-73%

                 21

         

Net income (loss)

                      (4)

 

                 272

                 68

298%

               204

         
                       

Basic earnings (loss) per share

                 (0.05)

 

                3.85

              0.97

296%

2.88

         

Diluted earnings (loss) per share

                 (0.05)

 

                3.68

              0.93

294%

2.75

         
                       

Growth (y-o-y)

         

0%

         

Sales and revenues

             

U.S. military sales increased to $1.2 billion (32% of sales) in 3Q2008 versus $59 million in 3Q2007 (3% of sales).

Sales of manufactured products, net

-20%

 

36%

24%

 

12%

 

Finance revenues

24%

 

-28%

-10%

 

-18%

 

Sales and revenues, net

-19%

 

34%

23%

 

11%

 
                       
                       

Revenue growth

                     

Truck

   

70%

49%

 

21.6%

 

Navistar's revenues increased 34% yo-y as asgainst our estimates of 23%, primarily due to higher than expected pricing improvement due to changing product mix and new product launch.

Engine

   

-17%

-23%

 

5.8%

 

Parts

   

10%

3%

 

6.6%

 

Financial service

   

-29%

-14%

 

-14.9%

 

Sales and revenues, net

-19%

 

34%

23%

 

11%

 
                       

Pricing growth

                     

Truck (q-o-q)

3.9%

 

8.3%

-1.0%

 

9.3%

 

Navistar's unit price in the truck segment increased 55% ahead of our estimates of 42% due to greater than expected impact on pricing due to new product launch like ProStar and higher than expected contibution from military segment.

Engine (q-o-q)

10.1%

 

11.3%

-0.8%

 

12.1%

 
               

Truck (y-o-y)

   

55%

42%

 

13.4%

 

Engine (y-o-y)

   

13.5%

1.2%

 

12.3%

 
                       

Volume growth (y-o-y)

                     

Navistar's shipments (y-o-y growth)

             

Navistar's truck shipments increased 10% in 3Q2008 versus our estimates of 5% increase while its Engine shiments declined 27% as against our estiamtes of a 24% decline.  Although Navistar's traditional segments continued to face weakness, improved performance from military segment helped the company to mitigate the weakness in other segemnts.

School buses

-26%

 

-16%

5%

 

-21%

 

Class 6 and 7 medium trucks

-54%

 

4%

-6%

 

9%

 

Class 8 trucks

-58%

 

48%

34%

 

14%

 

Total Traditional Markets

-75%

 

18%

14%

 

5%

 

Total Expansion Markets

-25%

 

-4%

2%

 

-6%

 

Truck shipments

-58%

 

10%

5%

 

5%

 
               

Engine shipments

-15%

 

-27%

-24%

 

-3%

         
                       

Costs of products sold

-19%

 

28%

22%

 

6%

 

Navistar's total cost and expenses increased 24%, 5% ahead of estimated 19% increase. However due to higher-than-expected pricing impact, Navistar's gross margins expanded to 21.2% compared to estimated gross margin of 18.2%
Simillarly we were expecting Navistar's operating margin to expand to 2.1% from a negatve margin 0.6%. However Navistar's reported margins expanded ahead of our expectations to 6.6%

Selling, general and administrative expenses

15%

 

5%

3%

 

2%

 

Engineering and product development costs

-25%

 

26%

19%

 

7%

 

Interest expense

6%

 

-30%

-19%

 

-11%

 

Total costs and expenses

-16%

 

24%

19%

 

5%

 
               

Gross margin

17.9%

 

21.2%

18.2%

 

3.0%

 

Operating margin

-0.6%

 

6.6%

2.1%

 

4.5%

 

Pre-tax margin

0.2%

 

7.1%

2.7%

 

4.4%

 

Net income margin

-0.1%

 

6.9%

1.9%

 

5.0%

 
               

Truck

 

 

 

 

 

 

 

       

Revenues

1,715

 

2,922

2,552

14%

370

         
                       

Price per unit (000's)

69.7

 

108.2

98.9

9%

9.3

         

Navistar's chargeouts in units (shipments)

                     

School buses

3,200

 

2,700

3,375

-20%

           

Class 6 and 7 medium trucks

5,600

 

5,800

5,289

10%

           

Class 8 trucks

6,500

 

9,600

8,719

10%

           

Total Traditional Markets

2,600

 

18,100

17,383

4%

           

Total Expansion Markets

3,900

 

8,900

8,425

6%

           

Navistar's total shipments

                6,500

 

            27,000

          25,807

5%

 

         
                       

Engine

 

 

 

 

 

 

 

       

Revenues

971

 

808

752

7.5%

56

         
                       

Price per unit (000's)

8.97

 

10.19

9.08

12.2%

1.11

         

Unit sales

                     

Ford

65,300

 

25,200

45,710

-45%

           

Other OEM

29,200

 

4,800

23,360

-79%

           

Total OEM sales

94,500

 

30,300

69,070

-56%

           

Intercompany sales

13,700

 

19,000

13,701

39%

           

Total sales

            108,200

 

            79,300

          82,771

-4.2%

 

         
                       

Parts

 

 

 

 

 

 

 

       

Revenues

405

 

444

451

-1.6%

(7)

         
                       

Financial service

 

 

 

 

 

 

 

       

Revenues

133

 

95

115

-17.3%

(20)

         

 

I have included the full variance analysis spreadsheet (yes the actual Excel spreadsheet) along with an updated valuation number for subscribers to download - see spreadsheet  Navistar Variance sheet (1.02 MB 2008-09-04 08:28:51) . For those who are not subscribers, the valuation has changed but since I don't believe that the company can maintain a 20x upside surprise in the military shipping I still have a bearish slant on the company. My investment horizon is 6 months to a year out, so please keep that in mind when reading my opinions.