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Surprisingly strong earnings from Navistar may mark the end of a long turnaround

The strong earnings report of long-beleaguered Navistar sent the stock soaring Tuesday, dragging other OEMs with it.

The manufacturer of the International brand of Class 8 vehicles–and smaller medium-duty trucks as well–reported a series of much stronger year-over-year numbers for the fourth quarter ended October 31. Revenue was up by 41 percent, net income rose by 188 percent and adjusted EBITDA was up 20 percent.

The cash balance in the manufacturing sector is $1.36 billion; the once debt-laden company retired $200 million in debt in October from internal cash and expects to make another debt retirement in April; and there is little sign of weakness in the backlog, according to the Navistar executives on the company’s earnings call.

That news sent the Navistar (NYSE: NAV) stock price climbing. At approximately 1:30 pm. it was up $3.30 to $27.14, a gain of 13.84 percent. It had been as high as $28.73 on the day. It also helped lift the stock of other OEMs, as it was in stark contrast to the suggestion that the run of a strong order book may be fading. At approximately 1:30 p.m. Eastern time, PACCAR (NASDAQ: PCAR) was up 0.78 percent to $56.87, while trailer manufacturer Wabash National (NYSE: WNC) was up 4.08 percent to $13.28.

The debt payment out of internal cash is the type of step that is generally not expected out of a company carrying a B- rating from S&P Global Ratings. That is one of the ratings agency’s lowest grades, and it was affirmed at that level over the summer. But Troy Clarke, Navistar’s CEO, said on the earnings call that after the payment of debt in April, Navistar has no more debt maturing until 2025.

Walter Borst, the Navistar CFO, said on the earnings call that following the April payment, the company will be “extremely well positioned. Beyond that, we’ll invest in the product.”

Besides celebrating Navistar’s achievements, Clarke said that from “an industry perspective, 2019 is shaping up to be a very good year.” Demand for class 8 trucks is going to be above replacement demand, and demand for class 6 and 7 trucks will also be strong.

Navistar raised its guidance on new vehicle builds to between 265,000 to 295,000 class 8 trucks. The actual build number in 2018 will be 277,000, it said. The projection on class 6/7 vehicles is 95,000 after a 2018 actual of 99,000.

The guidance on class 8 vehicles is conservative. ACT Research’s forecast for the year is 298,000 class 8 trucks, according to Navistar, which spelled out certain differences between the Navistar forecast and ACT in the slides presented during the call.

There were times during 2018 when the prior 12 months was running at a rate of close to 500,000 vehicles. The most recent FTR report for November showed November orders at 27,500, which if kept steady would translate to a 12-month total of 330,000 vehicles.

Navistar said its share of the class 8 heavy truck market in 2018 will be 14 percent, up from 10 percent just two years ago and 11 percent a year ago. Clarke said it was only the third time the company had notched a two-point gain in market share in a year, but was the first time it had done so profitably.

Within the financial reports were company chargeouts, which Navistar defines as trucks that have been invoiced to customers (as opposed to being in the order book but not having been invoiced.) Class 8 heavy trucks had 10,600 chargeouts for Navistar in the quarter ended October 31, compared to 6,500 chargeouts in the corresponding quarter of 2017. For the year, the numbers were 27,800 chargeouts versus 16,800 chargeouts in 2017.

The company has suffered from a number of calamities, many of them self-inflicted. Engine problems, accounting scandals, significant layoffs and takeover threats have all been concerns for various CEOs over the years, including Clarke, who took over in 2013. But with the company not only reporting strong earnings and debt repayment as well as the first time it has produced free cash flow since 2011, the earnings call had an element of a victory lap. Questions from analysts were granular and did not focus on existential issues regarding Navistar’s future.

Among the problems that have weighed on Navistar were underfunded pensions. The liability dropped $400 million during 2018 to $2.1 billion, and that was on top of a decline of $550 million the prior year. The engine issues of the past also led to significant warranty liabilities. Warranty expenses as a percent of revenue were 1.7 percent in the four quarter, down from 2.4 percent in the fourth quarter of 2017. The peak warranty liability balance at Navistar was $1.35 billion in 2013, but it’s now down to $529 million.

It was those sorts of occurrences that led Borst to declare that for Navistar, “2018 was a breakout year and marks the end of the company’s turnaround and the beginning of a new phase of long-term growth.”

Skeptics of the industry’s strength point to enormous backlogs in OEM order books and wonder how much it might be affected by cancellations going forward. In other words, how many orders will turn into chargeouts?

Clarke expressed confidence it would stick. Navistar can “tie a name to over 85 percent of our backlog, and these names are of some of the largest customers and most important companies in the trucking industry.” Given the size of those companies and their financial position, Clarke said he believes the backlog could hold even in the face of a softening market.

John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.