Commercial and military truck manufacturer Navistar International (NAV) provided its stock with an end-of-year reprieve following the issuance of a surprisingly vigorous fiscal-fourth-quarter 2018 earnings report on Tuesday. Shares ascended more than 15% in the postrelease trading session, and while the NAV symbol is still 35% in the red during 2018, it's at least heading into 2019 with renewed prospects for appreciation.
Below, we'll truck through headline numbers and highlight significant details from the last three months. Note that all comparative numbers in this article are presented against the prior-year quarter (the fiscal fourth quarter of 2017).
The raw numbers
|Metric||Q4 2018||Q4 2017||Change (YOY)|
|Revenue||$3.31 billion||$2.59 billion||27.8%|
|Net income||$188 million||$135 million||28.2%|
|Diluted earnings per share||$1.89||$1.36||28%|
What happened with Navistar this quarter?
Navistar reported that its top-line surge derived primarily from a 45% increase in "core" volumes. The company defines its core markets as class 6 through class 8 trucks and buses sold in the U.S. and Canada. These classifications include the heaviest categories of commercial vehicles, with gross weightings from 19,501 lbs. to 33,000 lbs. (classes 6 and 7) to 33,001 lbs. and above (class 8).
- In Navistar's truck segment, revenue rose nearly 41% to $2.6 billion. Segment profit increased 76% to $197 million. The company attributed the scaled-up profit to the higher core volumes as well as increased profitability in its defense business (Navistar manufactures tactical wheeled vehicles for the defense market). Profit was offset by climbing commodity costs and supplier constraints.
Parts segment revenue inched up just 1.6% to $2.4 billion. Segment profit of $156 million was similarly flat against the prior-year quarter. The company relayed that more robust profit in its Fleetrite parts brand was offset by higher shipping costs and by a reallocation of internal expenses between the development, engineering, and selling, general, and administrative (SG&A) expense categories.
Combining results for Navistar's global operations and financial services segments, which are significantly smaller than its truck and parts operations, revenue dipped 3% to $163 million. Profit improved 11% to $30 million due to strengthening conditions in the Brazilian economy, which benefited the global operations business.
- Navistar's operating margin improved by 1.3 percentage points to 6.7%, as a higher cost of goods sold was absorbed by the company's healthy revenue expansion.
Management noted that the company gained almost two percentage points of retail market share in class 8 vehicles during 2018, and it stated that Navistar was the only original equipment manufacturer (OEM) to gain market share in class 8 vehicles during the year.
Navistar also finished the year with 1.3 percentage points of higher retail school bus market share via its IC Bus subsidiary, which is focusing on engineering alternative fuel engines. As I discussed this summer, IC Bus is partnering with Volkswagen to bring the chargE school bus to market. The chargE is currently the only electric school bus concept in development.
- The company finished fiscal 2018 with a backlog of 45,400 units in core vehicles, versus 15,600 at the end of the prior year.
This month, Navistar agreed to sell 70% of its defense business (Navistar Defense) to private equity firm Cerberus Capital Management, L.P. The deal includes an exclusive long-term supply agreement under which Navistar will provide commercial parts and chassis to Navistar Defense. The transaction is expected to close in the first quarter of 2019.
- The company repaid $200 million of senior convertible debt notes that matured in October. Long-term manufacturing debt (i.e., total debt excluding debt issued to fund the company's financing business) now stands at $2.96 billion. That's equal to 3.2 times Navistar's 2018 EBITDA of $823 million, a relationship that indicates a pretty moderate debt load.
In the company's earnings press release, CEO Troy Clarke emphasized the characteristics he believes make Navistar an all-weather investment rather than one dependent on the changing fortunes of the U.S. economy:
While we expect 2019 to be another strong year for Navistar and the industry, it's important to recognize that Navistar as an investment is much more than just a [cyclical] play... As our ongoing improvements demonstrate, the company also has strong opportunities to benefit by recapturing market share, growing parts revenue, improving margins, generating free cash flow and further de-risking the balance sheet. For all these reasons, looking forward the company is well positioned to generate superior shareholder value.
Navistar issued preliminary earnings guidance for the upcoming year. The company expects revenue to land between $10.75 billion and $11.25 billion in fiscal 2019. Adjusted EBITDA is anticipated to fall between $850 million and $900 million. The company plans to provide an updated outlook for fiscal 2019 following the completion of the Navistar Defense transaction in the current quarter.