On the Road Again With Navistar

There are one-hit wonders, and then there are those�stocks�that get hit only to come back for bigger and better gains in the future.

Who falls where takes more than just looking at a stock's price, so the fact that truck maker Navistar International (NYSE: NAV  ) saw its stock rise 42% over the past month and is up 70% year to date means we need to dig a little deeper to see whether there's any reason to expect this run-up to continue.

A mighty temblor
Like a tractor-trailer jack-knifing on the highway, Navistar similarly careened out of control, done in by an emissions control system that cut costs but was out of compliance with tough EPA air quality regulations. The agency had allowed the trucker to skirt the regulations first by using pollution credits it had amassed and then by paying a fine, but when the courts struck down that policy, Navistar faced losing customers who didn't want to buy what were essentially noncompliant trucks.

Sales fell by more than $1 billion in fiscal 2012, or 7%, forcing it to capitulate and adopt the industry standard. Engine maker Cummins (NYSE: CMI  ) , which owns 40% of the market and had originally supplied Navistar with engines until it sought the alternative emissions control strategy (but which didn't work with Cummins' engines), was brought back into the fold to provide it again with emissions-compliant product. Navistar also had to contend with activist investor Carl Icahn breathing down its neck, agitating for it to be sold to Oshkosh (NYSE: OSK  ) .

Spring cleaning
The turnaround program Navistar hit on was to clean house. It ousted its CEO and decided to focus predominantly on the North American truck market where it was losing share, and worry less about overseas growth initiatives. Part of that included selling its Indian joint venture with Mahindra & Mahindra. Although it's still early in the program, the trucker seems to have at least regained control of the wheel.

Less is more
First-quarter losses narrowed to $123 million, or $1.53 per share, from $153 million, or $2.19 per share, a year ago, though on an adjusted basis that ignores discontinued operations, and per-share losses shrank further to $1.42, comparing quite favorably with Wall Street's expectations. Importantly, Navistar is building up its cash reserves again and expects that by the end of the second quarter it will have between $1 billion and $1.1 billion in the bank.

Navistar trails both Daimler's Freightliner brand and Paccar (NASDAQ: PCAR  ) , the maker of Peterbilt and Kenworth trucks, in North America, but believes it can quickly regain lost share once it converts all its trucks over to the new engines. Although first-quarter revenues were down 12% from 2012, it's looking to the second half of the year, when the full complement of clean engines has been introduced to really rev its engines once more.

The company also just installed a new CEO to replace the interim executive, who took over the reins after the C-suite shakeup last year. Analysts seem to be on board with how the turnaround is progressing and generally give the company high marks for making the necessary changes.

Not the path least taken
I agree the new road Navistar is on is a better traveled one than the path it had been heading down. Last year, I suspected management had largely realized the mistakes it made and was committed to turning the big rig around, so I marked it to outperform the broad indexes on Motley Fool CAPS as a means of holding myself accountable for bullish sentiments at the time.

Since then, the stock has risen 32% compared with a 17.5% gain in the S&P 500. Over the past year, shares have risen 77%, but I think now it's time to see if this plan pays off. Its engines are still undergoing review by the EPA, and its warranty repairs for trucks built since 2010 still have to be made. It says those costs should be reduced going forward, and Navistar expects the EPA endorsement to come by the end of the month. If that happens, the new engines will hit the market in April. The question investors have to decide is whether truckers will start buying its rigs again, having damaged itself through the misguided plan it followed.

Navistar isn't profitable now, and though it has a plan in place to reach breakeven again, it still has a long road ahead of it. The easy money has been made it seems and a narrower focus suggests that while growth is still probable, it may not be the vaunted gains it's already achieved.

I'm not sure it will be the same growth story from here, but let me know in the comments box below if you think Navistar is still on the road to success or, having pulled onto the shoulder, if it will see better financed and prepared rivals pass it by.

Shake, rattle, and roll!
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