Navistar's Earnings: Nearly As Bad As They Look

If you're an investor in Navistar International (NYSE: NAV  ) , you've probably heard the bad news by now: Navistar reported a big loss Wednesday morning, more than twice as big as had been feared. Investors promptly panicked, sending the shares down as much as 6.3% at one point in the day's trading, and closing them out with a 2.8% loss in market cap. But was the news really as bad as all that?

Let's find out.

Beginning with the headline numbers, Navistar reported:

  • Fiscal Q3 2013 revenue of $2.9 billion, down 12% year over year.
  • 11% gross margins, 270 basis points worse than last year's Q3 gross margin of 13.7%.
  • On the bottom line, $3.06 per diluted share in losses, 151% worse than last year.

Ouch.
Navistar was rightly punished for a pretty poor report -- yet the news isn't all bad. For example, reviewing Navistar's results year-to-date, we see that net losses are up more than threefold to $710 million, but actual cash losses -- free cash flow -- are "only" negative $102-million. While that's certainly worse than the $96 million in positive free cash flow Navistar had generated by this point in time, last year, it's better than the GAAP number. Also, Navistar has cut capital spending by 46%, helping to mitigate cash burn, and is right-sizing its workforce for the same reason.

Putting a bright face on things, Navistar CEO Troy Clarke pronounced himself "pleased" with the company's "cash performance" during the quarter and highlighted the company's $1.09 billion in "manufacturing cash and marketable securities" as indicative of the company's liquidity as it works to turnaround its sales and profits.

Final point: In that regard, Clarke pointed out that Navistar won 20% of all new truck orders placed industrywide in Q3, an 8% improvement in "order share" (as opposed to "market share"). So things may be looking up ... eventually.

Foolish takeaway
Still, are these few bright spots in the report, and hopes for more in the future, reason enough to run out and pay 20 times forward earnings for a company that's earning exactly nothing today, paying no dividend, generating no cash, and mired in $3.6 billion in net debt?

Almost certainly not. Before we invest in Navistar again, we'll want to see proof that the turnaround is taking shape ... and a much lower stock price as well.

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