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.
Navistar’s results analysis:
In 3Q2008, Navistar reported revenues increased 34% to $4.0 bn over $3.0 bn in 3Q2007 as increased contribution from military products and improved pricing helped the company to more than offset the weakness in traditional truck markets, engine parts and financial segment. Navistar’s U.S military sales increased significantly to $1.2 billion in 3Q2008 compared to just $59 million in 3Q2007 (over a 20x increase, a exasperatingly unbelievable pop that raises many questions) . As a result of higher military sales, Navistar’s largest customer exposure tilted from Ford (a company struggling with its own solvency issues that actually ended up on our short scan) previously to the U.S government in 3Q2008. The U.S. government contributed the largest proportion to company’s sales with 32% of revenues in 3Q2008 as against 3% in 3Q2007. Besides higher military sales, Navistar’s pricing improved substantially due to change in product mix and introduction of ProStar products. Navistar’s unit price in the truck segment increased 55% y-o-y while engine unit price increased 13.5% y-o-y leading to expansion of margins. Despite a 28% increase in cost of product sold, Navistar’s gross margins increased to 21.2% as against 17.9% in 3Q2007 while its operating margins increased to 6.6% in 3Q2008 versus a negative operating margin of 0.6% in 3Q2007. However despite improved pricing and increased contribution from military segment, Navistar’s traditional truck and engine segment continued to face challenges. In 3Q2008 shipments of school buses shipments and expansion markets cloaked a y-o-y volume decline of 16% and 4%, respectively while engine shipments excluding intercompany sales witnessed a decline of 68% in 3Q2008 over 3Q2007. Segment profit from the engine segment declined 92.3% to $5 mn in 3Q2008 from $65 mn in 3Q2007 while financial services reported a loss of $1 mn as against profit of $40 mn in 3Q2007. However higher profits from the truck segment at $357 mn in 3Q2008 against $7 mn in 3Q2007, helped Navistar to report profit before tax of $280 mn versus $5 mn in 3Q2007. Overall improved pricing and higher military sales resulted in Navistar’s net income to increase to $272 mn (or $3.68 per share) versus a loss of $4 mn (or $0.05 per share) in 3Q2007. As a result of record growth in 3Q2008, Navistar has raised its guidance for full year. Earlier in August 13, 2008 (just over two weeks ago) Navistar issued full year EPS guidance between $4.26 and $5.72.
Decline in net income
HSBC’s net income fell 29% y-o-y to US$7.72 billion (or US$0.65 per share) in 1H 08 from US$10.9 billion (or US$0.94 per share). The bank’s profitability declined due to the rise in loan impairment charges, mainly in the US, and decrease in profit from its Hong Kong operations. The bank’s pre-tax profit declined 28% to US$10.25 billion in 1H 08 from US$14.16 billion in 1H 07. Pre-tax profit in Europe rose to US$5.18 billion from US$4 billion but fell to US$3 billion from US$3.33 billion in Hong Kong over this period. In the rest of Asia-Pacific and Latin America, pre-tax profit increased to US$3.62 billion from US$3.34 billion and US$1.27 billion from US$1 billion, respectively, during the period 1H 07 to 1H 08.
The bank's net interest income rose to US$21.18 billion in 1H 08 from US$18.23 billion in 1H 07. However, loan impairment charges grew to US$10 billion from US$6.35 billion due to rise in delinquencies in North America. HSBC set aside US$10 billion as loan-loss reserves in 1H 08 compared to US$17.2 billion in 2007 and US$10.6 billion in 2006. The bank’s core Tier 1 capital fell to 8.8% as of June 30, 2008. Company reports show that HSBC had higher capital (9.3%) at the end of 2007 compared to Edinburgh-based Royal Bank of Scotland Group Plc (7.3%). HSBC also raised US$2.1 billion through the issue of Perpetual Subordinated Capital Securities in April 2008.
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