Navistar's Paper Profit Puffery

Sometimes, the Street gets it exactly right. Shares of big truck maker NavistarInternational (NYSE: NAV) took a market-leading, 7% whack this morning even though the firm predicted record sales and earnings for the future. What gives?

Well, a quick read through today's earnings pre-announcement shows that some portions of the upcoming earnings increases aren't based on the most solid footing. They're not exactly building on quicksand, but let's just say they could use a bit more bedrock.

The announcement highlights expected fourth-quarter profit of $148 million, a level not seen since 1979. (Why the folks at Navistar investor relations bothered to highlight the fact that the company has spent nearly three decades clawing back toward a result last achieved before disco balls were retro is beyond me.)

The per-share tally will come to $1.88, which looks better than last year's $1.00, to be sure. And it beats analysts' estimates. But on the other hand, it depends on bean counting, such as "anticipated adjustment from the application of certain accounting standards at the company's finance subsidiary." (To be fair, Navistar's not the only truck company building profits by adjusting the numbers in the finance division. Ford (NYSE: F) pulled a similar rabbit out of its hat in October.) Back at Navistar, the real sticking point seems to be that rosy guidance for the upcoming year relies on a similarly soft source: a $65 million tax break.

Overall, the firm appears to be executing well on plans to improve margins and become more consistently profitable, despite competition from DaimlerChrysler (NYSE: DCX), GM (NYSE: GM), and Paccar (Nasdaq: PCAR).

Good for it. Now consider putting this stock on your "do not buy" list. The Street seems to have a tough time getting a bead on Navistar's numbers, and that creates some volatility. Factor in the knowledge that we're talking about a heavy, cyclical industry, and you have the makings for real uncertainty. If you're into companies with huge costs that are proven long-term destroyers of wealth, hey, have at it. This Fool will stick with just about anything else.

For related Foolishness:

• Why can't carmakers sell?
• See Navistar crash into estimates.
• Watch Navistar turn around.

There's a small company poised to capitalize on new technology for diesel engines, among other advanced products. Check out Stocks 2005 to get a look at it, plus picks from Fool co-founders Tom and David Gardner.

Seth Jayson and his RAGBRAI cohorts are in the market for a nice used bus, not unlike those made by Navistar. At the time of publication, he had positions in no firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.