As I recall, the tale of the prodigal son goes something like this: Boy gets in trouble. Boy leaves home. Boy gets in worse trouble. Boy returns home. Everybody hugs boy.
Navistar's (NYSE: NAV) fall from grace and subsequent return to the NYSE may bear a passing resemblance to the old formula, but it takes some significant detours. First, the company got itself delinquent on about two years' worth of SEC filings. After the requisite multiple warnings of imminent delisting, the NYSE (NYSE: NYX) did finally carry through on its threat, delisting the stock in early 2007. No less a procrastinator, Navistar finally got around to filing its financials this year, and it was reinstated on the Big Board yesterday -- where investors promptly sold off the stock by 5%.
No hugs for Navistar
So why did Mr. Market give its prodigal son the proverbial (pun intended) cold shoulder yesterday? Perhaps because it's easier to "sell short" a listed company than something relegated to the Pink Sheets. While Navistar's CEO exulted yesterday: "We're back and stronger than ever," the picture isn't quite as clear-cut as that.
Yahoo! Finance hasn't yet gotten around to crunching Navistar's numbers; it currently provides just a bare-bones outline of Navistar's financial situation. What follows is a review based on the company's trailing-12-month data, as collated by Capital IQ:
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Navistar
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TTM Data
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Sales
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$13.1 billion
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Profit
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$55 million
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Operating margin
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1.2%
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Free cash flow
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$379 million
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As a maker of trucks, engines, and vehicle chassis, Navistar competes with firms like Ford (NYSE: F) and GM (NYSE: GM), Deere (NYSE: DE) and Caterpillar (NYSE: CAT), PACCAR (Nasdaq: PCAR) and Daimler. From a GAAP perspective, Navistar's losing the race against pretty much everyone on this list save the Detroit Duo. With the sole exceptions of GM and Ford, Navistar's rivals all score operating margins of 9% or better.
Short it!
Given these competitive dynamics, I can certainly see why investors might look askance at the newly relisted Navistar. Roughly 85 times trailing earnings seems a pretty premium to pay for an industry laggard.
Not so fast ...
Yet that valuation may soon change for the better. In an investor presentation filed with the SEC yesterday, Navistar noted that it expects to earn $1.6 billion in operating profit from its manufacturing segment next year. That would likely raise operating margins past 10% -- putting Navistar right back in the running with its rivals.
And if Navistar then proceeds to grow at the predicted rate for its industry (13% per year over the next five years)? Why, I suspect investors will happily slay a fatted calf or two for Navistar next year.
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