Is Navistar the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Navistar (NYSE: NAV  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Navistar.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.3% Fail
  1-Year Revenue Growth > 12% 11.97% Fail
Margins Gross Margin > 35% 14.8% Fail
  Net Margin > 15% 9.4% Fail
Balance Sheet Debt to Equity < 50% NM NM
  Current Ratio > 1.3 1.35 Pass
Opportunities Return on Equity > 15% NM NM
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   1 out of 7

Source: S&P Capital IQ. NM = not meaningful due to negative earnings and shareholder equity. Total score = number of passes.

With only one point, Navistar clearly has some work to do. The truckmaker has lost nearly half its share value over the past year and the company is now facing a serious challenge to its business.

Navistar is an international trucking giant whose products have both military and commercial applications. Defense has been fairly strong lately for Navistar, which saw big revenue gains late last year even as armored-vehicle rival Oshkosh (NYSE: OSK  ) took a double-digit percentage hit to sales.

But Navistar has faced a host of problems in recent years that are now coming back to haunt it. Some of the engines it produced have developed calibration problems, spurring warranty claims and repair costs. Trouble with a brake supplier hampered production, and brake leaks and faulty seat cushions in school buses have been another hassle.

Navistar has responded with a variety of tactics. It's trying to move strongly into emerging markets. Competition abroad is fierce, with Cummins (NYSE: CMI  ) and PACCAR boosting their international offerings to take advantage of faster growth rates. But another strategic move that has paid off well involves agreements and a joint venture with Caterpillar (NYSE: CAT  ) to boost their presence around the world. In addition, Navistar announced a partnership with Clean Energy Fuels (Nasdaq: CLNE  ) earlier this year to develop natural-gas-powered trucks, another response to Cummins.

Still, success has eluded Navistar so far. Earlier this week, Navistar shares plunged after a court ruled that it would have to revamp its heavy-duty diesel truck engine line to meet emissions guidelines rather than simply paying the EPA a fine. Combined with its other challenges, Navistar couldn't have gotten the news at a worse time.

For Navistar to improve, it needs to strengthen its alliances and find ways to compete better in an ever-tougher environment. Without some good results, Navistar may never get much closer to becoming a perfect stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Navistar may not be the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Navistar to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Clean Energy Fuels, Cummins, and PACCAR. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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