Oh, Navistar (NYSE:NAV), what am I going to do with you? True, this maker of heavy-duty trucks has had its problems, but when I last wrote about it, I came away thinking the company could still hold some potential. The big question that remains, of course, is whether that potential actually turns into long-term gains for investors.
The company's third quarter looked pretty solid. Sales rose 27% for the period, and net income climbed by 28%. Although segment margins (presented in a separate, supplemental release on the company website) eased off, the company is apparently having some success in rolling "temporary" surcharges over into longer-term price increases.
As the top-line performance might suggest, volume was pretty solid during the quarter. The company increased its shipments of medium and heavy-duty trucks by about 15% while posting slightly higher margins. Shipments of midrange diesel engines grew by almost 35%, though margins contracted pretty significantly.
Although the company didn't include a cash flow statement in the earnings release, you can find that information within the supplemental material. Operating cash flow has increased notably from the same nine-month period last year, but the company is still in a position of net negative free cash flow. What's more, the company's very low return on assets is not exactly the stuff of this Fool's dreams.
I certainly want to give Navistar credit where it's due. The company has apparently worked hard to improve its operating efficiency, including efforts to reduce the number of work hours required to build a new truck model.
That said, I'm a bit nervous about the industry as a whole. It looks like 2005 and 2006 will be OK, but that they'll be followed by a cyclical drop-off in 2007. That, in turn, will likely be followed by another upturn in 2009 as customers buy ahead of new EPA rules that will go into effect in 2010.
Of course, other companies such as Cummins (NYSE:CMI), Motley Fool Stock Advisor recommendation Paccar (NASDAQ:PCAR), Volvo (NASDAQ:VOLVY), and DaimlerChrysler (NYSE:DCX) all face that same macro environment for big-truck business. But companies like Cummins and Paccar also offer stronger performance metrics -- such as margins and return on capital -- and both pay a dividend. Although I'm not discounting Navistar's potential to improve and even capture share, I'm still not entirely sold on the idea of backing up the truck for this one.
For more on big rigs:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
