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Navistar Could Be an Intriguing Play on a Global Recovery

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Even though Navistar International (NYSE: NAV  ) posted a surge in second-quarter adjusted EPS, fueled by strong industry demand, the company's stock dropped heavily, with the number falling below analysts' projections. Although the profit uptick allowed the Illinois-based company to raise the lower end of its 2011 adjusted EPS guidance, it indicated broader issues, such as supply constraints, that could weigh on its operations.

The numbers
Navistar's revenues for the quarter jumped 22% to $3.4 billion, up from $2.7 billion in the year-ago period. All business segments saw increasing revenues, with the truck segment reporting the strongest boost at 22.5%, from $76 million a year ago to $92 million. Higher volumes and favorable pricing from better engines boosted the bottom line. The engine business saw revenue growth of 18%, but year-over-year net income for the segment dipped from $15 million to $2 million this quarter, mainly because of one-time warranty expenses, and costs incurred on new launches. The company recently launched its own 13-liter and-15 liter engines, instead of continuing to rely on Cummins (NYSE: CMI  ) for supply. These are short-term expenses, and investors needn't be concerned going forward.

Other segments, including parts and financial services, recorded their own significant jumps. Navistar is also a supplier of military vehicles, and its military revenues got a boost as well.

Navistar's cash flow from operations rose to $221 million from $141 million last year. Its overall financial position looks better, with a reduction in the total debt-to-capital ratio from 135.9% last year quarter to 118.6% this quarter.

The outlook
Across the board, the global truck industry is looking positive. The American Trucking Association says the industry will witness faster growth and a good decade ahead, post-recession. I'm not sure I buy into all of that, but it's potentially good news for a large truck maker like Navistar.

Nevertheless, the industry is not competition-free. Paccar (Nasdaq: PCAR  ) , one of the largest heavy-truck manufacturers, is increasing its presence globally. Its DAF trucks are leading in the U.K., the Netherlands, and Belgium. Paccar's Brazil share is also increasing, with plans to invest another $200 million there in next two years.

Navistar's demand for military trucks faced a temporary setback, when the military selected competitor Oshkosh (NYSE: OSK  ) for a supply of trucks to Afghanistan. But Navistar raged on, adding a $357 million order from the Marines to its order book just a few days back.

New energy
Another factor that will probably work in Navistar's favor will be the expansion into other global markets and the introduction of new, innovative products, such as natural-gas engines.

Last year, the company entered into a joint venture with India's Mahindra & Mahindra to introduce trucks the sprawling Indian market. To show that it means business, the company has also entered into another global venture with Caterpillar (NYSE: CAT  ) to target markets in Australia, Russia, Brazil, and South Africa. Similar agreements in China are also under way and could add considerably to Navistar's growing portfolio.

The Foolish bottom line
Navistar expects a good year ahead, with increased production and earnings. Further, with industry recovery and expansion plans in place, Navistar looks like a good bet in the near future.

Fool contributor Neha Chamaria owns no shares of any of the companies mentioned.  The Motley Fool owns shares of Oshkosh. Motley Fool newsletter services have recommended buying shares of PACCAR. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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