In 1986, the Dow Jones Industrial Index welcomed two (sort of) new members: USX Corporation, which until then had been (and now is once again) known as U.S. Steel (NYSE:X), and truck maker Navistar International (NYSE:NAV), which until that year had been known as International Harvester. The name changes, however, didn't make either company any more "relevant" to the changing U.S. economy and, by 1991, both had disappeared from the Dow under any name.
Today, though, I betcha the Wall Streeters are wishing that Dow Jones (NYSE:DJ) had kept both companies on its index just a wee bit longer -- it would have been good for the bankers' morale to see these two companies help tinge the Dow green this earnings season. Not only is U.S. Steel posting record profits this year (along with every other steelmaker and their brothers, uncles, and assorted family pets); Navistar, too, has finally made good on all the promises it has been making over the past year.
(Incidentally, you can read all about those rosy predictions, and the thorns that grew in place of them, in Seth Jayson's series covering Navistar's fiscal 2003, first half of 2004, and third quarter of 2004 results.)
Yesterday, Navistar wowed its critics as it posted a near 28% increase in annual sales year over year, and $3.20 in per share diluted profits for fiscal 2004. That's quite a turnaround from the company's $0.31 per share loss of last year, and Mr. Market gave the company a perhaps deserved round of applause in the form of a 4% boost in share price.
Why "perhaps deserved?" Because the company's profits growth came with several caveats attached. First off, both inventories and receivables increased faster than sales in 2004, at 33% and 30% rates, respectively. That's not a whole lot faster than sales growth, but it does at least hint at a certain lack of quality to those sales. My more serious concern with Navistar, however, is the huge growth in its share count. This is no start-up company, folks. Under one name or another, Navistar has been in business for close to a century now. Any company that old and established simply has no cause to be diluting its shareholders at the 18% rate that Navistar did last year. Or the 13% rate posted the year before.
So while it's great to finally see revenue and profits growth reported by an automaker whose return address doesn't read "something, something, Tokyo," on the dilution issue alone, I'd urge investors to think long and hard before investing in Navistar.
Review Navistar's roadmap to this year's profitability in:
Fool contributor Rich Smith holds no position in any of the companies named in this article.
