When Navistar International Corp. Loses, Shareholders Win

It's not often you see a company admit that they just lost $297 million in a quarter... then watch the stock price jump. But on Thursday, that's just what happened at Navistar (NYSE: NAV  ) .

The question is why?

And the answer is that by this point in time, pretty much no one expects anything different out of Navistar.


Navistar's LoneStar -- prettier than Navistar's income statement. Photo: Navistar.

Keep on truckin' (and never mind the losses)
For two years straight, Navistar has done nothing but lose money for its shareholders. Data from S&P Capital IQ reveal that it lost $3 billion in 2012, $900 million more in 2013, and close to $950 million lost over just the past 12 months. All the while, revenues have gone nowhere but south.

From the perspective of free cash flow (cash profits, as opposed to accounting profits as calculated under GAAP), things have been both better, and worse. Better, because free cash flow was negative last year, and remains so today. (But at least it's less negative than what you see on the bottom line of the income statement.) And worse, because if the cash isn't getting burnt at quite the rate that losses are reported, operating cash flow in particular -- the company's lifeblood -- finally turned negative in the past 12 months.

But none of this explains why investors are looking favorably on Navistar's report of yet another quarterly loss Thursday. So what does explain it?

In a word: hope.

Navistar attributes much of its recent string of GAAP losses to warranty claims on its engines, and the cost of transitioning to new engines to meet tightened federal emissions standards -- made worse by a $151 million asset impairment charge taken on the firm's Brazilian operations. With luck, these costs are now in the rearview mirror, however. And looking forward, Navistar CEO Troy Clarke hopes that the company will soon reap the benefit of improved market share (resulting in stronger sales and profits), thanks to a sharp "bounce back" in Q2.

Indeed, while Navistar's loss was disheartening, sales already grew stronger in Q2 than expected, rising 8.7% to $2.75 billion for the quarter. More impressive still, the company noted that its backlog of orders awaiting fulfillment is up 82% year over year. Clarke told investors Thursday that his company has "positive momentum," and that they can expect to see this momentum "continue to build quarter-over-quarter, with third quarter results better than second quarter, and our fourth quarter performance better than the third quarter."

Mind the bump
Notice, however, that Clarke said nothing about Q1 -- next year's Q1. That's the quarter when partner Ford Motor (NYSE: F  ) , which for the past 13 years outsourced its F-650 and F-750 commercial truck production to Navistar, will bring this business back in-house. It's the quarter in which Navistar will see a $400 million a year revenue stream dry up -- and gain a new competitor in the process. It's the quarter that Navistar investors should be worrying about.

How much should you worry? Here's a clue: Analysts who follow Navistar think that despite its MRAP business having largely disappeared, and despite being about to lose $400 million worth of Ford business, Navistar will grow its sales by $1.5 billion in 2015 -- and earn a profit in the place of this year's expected loss. Personally, that doesn't sound very likely to me.

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