When you look beyond personal vehicles, the new vehicle market isn't so bad. Demand for trucks, big trucks, seems to be pretty healthy these days.
The nation's third-largest builder of heavy-duty trucks, Navistar (NYSE: NAV), reported both good and bad news for the second quarter. While revenue was quite strong, up 25% to $3 billion, margins were pressured by high steel costs and high SG&A expenses. As a result, net income grew only by about 2%.
On the positive side, management optimism about truck volumes, price improvements, and stabilizing steel prices led the company to raise guidance for the full year by a pretty meaningful amount. Management is now looking for earnings of between $4.80 and $5.15 for the full year -- well above the current analyst average of $4.66.
Looking back on the quarter that was, Navistar appeared to see its biggest gains in Class 8 trucks (big suckers that are used for jobs like waste hauling and construction). The company appeared to gain share in the quarter -- most likely at the expense of DaimlerChrysler's (NYSE: DCX) Freightliner division -- and raised its volume forecast for the rest of the year.
Looking ahead, management has set a high bar for itself. Management is clearly expecting better margins and shipments, particularly in the fourth quarter. Why this business should be so heavily weighted toward the fourth quarter is a mystery to me -- especially when you don't see that pattern at competitors like Paccar (Nasdaq: PCAR). And management apparently doesn't know either: When asked by an analyst on the conference call, they had no real explanation for the strong apparent seasonal effect.
While business seems to be improving, this is still a risky play. Accounting inconsistencies have led to restatements and an SEC investigation. Debt is quite high, even if you exclude the debt tied to the financial services business. Navistar also has exceptionally low margins relative to the competition and pays no dividend. Finally, if steel prices don't continue to ease back, that guidance could be in trouble.
On the plus side, valuation seems pretty modest if management can deliver. Better yet, the market for heavy-duty equipment is certainly strong. The stocks of other heavy-duty players like Paccar, Caterpillar (NYSE: CAT), and Oshkosh Truck (NYSE: OSK) have done well.
The last two names are not strictly comparable to Navistar, but my point is this: The economy is up, buyers are coming back, and these cyclical players seem to be perking up nicely. With more room for the cycle to run, Navistar could still turn it around and deliver some improved performance.
The Fool has more heavy-duty stories for you to read:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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