The Truck Cycle Has Likely Bottomed, And Negotiations With Traton Could Be Fruitful For Navistar

Navistar's (NAV) story over the last two decades has been a difficult one, with the company losing significant share in its core medium-duty and heavy-duty truck markets and suffering repeated hits to its reputation from product quality issues (including, but not exclusively, the well-known EGR fiasco). Adjusted annual revenue growth over the past 10-15 years has been slightly negative, with very little in the way of meaningful free cash flow generation, and the shares have done almost nothing over that time.

The five-year returns haven't been so bad, though, and now-former CEO Tony Clarke has done some good things with the company. Even so, I believe Traton's improved offer for the company is a good starting point, and I am encouraged by the board's willingness to pursue negotiations. While a fully turned-around Navistar would indeed be worth more than Traton's offer, perhaps substantially more, I believe shareholders have to weigh the upside potential against the risk of the company coming up well short of the performance metrics that would drive that upside.

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The Truck Cycle Has Likely Bottomed, And Negotiations With Traton Could Be Fruitful For Navistar

Improving End-Markets And Market Share Not Enough For Cummins

Investors are definitely conflicted about machinery stocks these days, with mining and ag doing well, but a lot less enthusiasm for construction and trucking as investors worry about how the end of the cycle will play out. I didn’t see enough upside in Cummins (CMI) to want to dive in back in late May, and the market-lagging return since then doesn’t exactly have me regretting that call (though Cummins has done comparatively better than most heavy machinery names over that time).

I can’t say that I feel all that differently about Cummins now. The North American truck cycle looks like it has longer legs (into 2019), but that doesn’t really change the fundamental long-term valuation picture. Likewise with the long-awaited recovery in power gen and strength in markets like mining and oil/gas. Although the shares do look a little undervalued on a near-term basis and I like the company’s ongoing moves to invest in electrification products/technology, I just don’t see the upside to warrant taking a new position now.

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Improving End-Markets And Market Share Not Enough For Cummins

Cummins Seems To Be In A Period Of Transition

I liked Cummins (NYSE:CMI) back in February, when the sell-side's predictable doom cycle had price targets (and the share price) below $100 and the shares looked cheap even on modest long-term growth expectations. Since then, the shares have climbed about 20% - in the same ballpark as other commercial vehicle component companies like Allison Transmission (NYSE:ALSN), Dana (NYSE:DAN), and Tenneco (NYSE:TEN).

Now, though, investors are looking at a situation where the company is a little further through the ugly part of the cycle and where margins have held up pretty well, but where the shares now bake in more robust expectations. Cummins still has the wherewithal to do something significant through M&A, but management's caution here is both cause for celebration (being careful to preserve value) and concern (is there a thesis-changing deal out there?). That said, many of Cummins' customers continue to push ahead with internal engine efforts, and I think the risk/reward equation is more balanced today.

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Cummins Seems To Be In A Period Of Transition

Allison Transmission Grinding Through A Rough Patch

The North American commercial truck market is still in pretty rough shape. While August vehicle orders showed sequential growth for both Class 8 trucks (up 37%) and Class 5-7 trucks (up 10%), both were down on a year-over-year basis (down 29% and down 5%, respectively). For Class 8 trucks, that's a year and a half of consecutive Y-O-Y declines in the monthly numbers, while Class 5-7 trucks have seen negative annual comps in three of the last four months.

That's a tough backdrop for Allison Transmission (NYSE:ALSN), the leading manufacturer of automatic transmissions for heavy-duty vehicles, but Wall Street has minded too much. While the shares are down a bit over the past year, they are up almost 20% from my last article, just a little below Cummins (NYSE:CMI) and Twin Disc (NASDAQ:TWIN), though the latter has been much more volatile. Investors seem to be encouraged by Allison's ability to retain strong share and good margins through this downturn, as well as the prospects for increased share on product roll-outs by customers like Navistar (NYSE:NAV) and PACCAR (NASDAQ:PCAR).

I still like Allison. It's not tremendously undervalued relative to the operating and macro risks, but it is priced for double-digit returns. More to the point, management seems to be following a sensible plan and one that I think can add share in important under-penetrated markets like metro Class 8 and international over time.

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Allison Transmission Grinding Through A Rough Patch

Seeking Alpha: Cummins Is Alluring... But Is It A Trap?

By and large nature teaches you to be wary of pretty things - they don't taste good, they have fangs, and so on. That may be an odd segue into a discussion of Cummins (NYSE:CMI), but it captures how I feel about the shares. I think Cummins is a great company, but as attractive as the shares seem, I do wonder how they will fare as the North American truck cycle peaks and many emerging markets continue to struggle.

I think investors forget that trucks and truck components are cyclical markets at their own risk. But I also think that the company can still generate long-term revenue and cash flow growth in the mid-single digits, and that the shares are trading below the value of those cash flows. I'm wary about buying into a peaking North American market, but the underlying strength of the components business, the opportunities in China, and the overall quality of the business make this a tough stock to ignore.


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Cummins Is Alluring... But Is It A Trap?

Seeking Alpha: Allison Transmission Hits Pause

As I have written in prior pieces, stocks like Allison Transmission (NYSE:ALSN), Cummins (NYSE:CMI), and BorgWarner (NYSE:BWA) get more interesting to me during those periods where investors start worrying about the near-term growth environment. All of these companies are, at least in my opinion, proven winners in the vehicle components space by virtue of a long-term focus on innovation and responsible year-to-year management of the business.

It would look as though Allison is heading into one of those pauses. The shares are up about 7% since my last piece, putting them in the same "meh" performance group as Cummins, BorgWarner, and Tenneco (NYSE:TEN), and management's guidance back in February for the full year was not inspiring, as revenue may decline this year. While there is certainly risk in buying these shares ahead of earnings (due in about two weeks), I think Allison still has attractive long-term growth potential and a price at or below the low $30's should be a good opportunity for long-term investors.

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Allison Transmission Hits Pause

Seeking Alpha: Cummins Revving Up For The Next Truck Cycle

There's no doubting now that the operating environment for the North American Class 8 truck industry is getting better, and Cummins (CMI) stands to be a major beneficiary. European and Chinese truck markets are also looking stronger, helping to offset weakness in other areas like Brazilian trucks and power generation. Cummins shares are already up about 28% over the past year, and BorgWarner (BWA) and Dana (DAN) may offer a little extra relative performance, but I wouldn't rush to take profits just yet.

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Cummins Revving Up For The Next Truck Cycle

Seeking Alpha: Navistar On Better Footing, But Still Shaky

Turnaround stories rarely ever follow a smooth upward arc and Navistar (NAV) is proving no exception. Management has laudable progress with cost reductions, design improvements, and a generally more realistic approach to running this business, and Wall Street has noticed - taking the shares up about 50% over the past year.

As a look at the chart will reveal, though, that hasn't been a stepwise progression and shares have both risen and fallen sharply on quarterly results. This quarter looks like no exception, as investors aren't liking the shortfall in revenue or quarterly market share, nor the reduced EBITDA guidance for the next quarter. Navistar shares look like an iffy value prospect today, and investors who wish to own these shares now need to make their peace with the above-average volatility that is likely stretch on into 2014.

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Navistar On Better Footing, But Still Shaky

Investopedia: Is Cummins Building For Bigger Things?

Modeling and assigning a fair value to Cummins (NYSE:CMI) is not a particularly easy task. It's hard to find a better company in the transportation components sector, not to mention the wider industrial sector as a whole. Through all of the cyclical ups and downs of the commercial vehicle market(s), Cummins almost always generates double-digit returns on invested capital and has managed to stay in the green with free cash flow.

So quality and ability to execute are not problems. What is the problem is estimating fair future growth rates. It seems hard to imagine that Cummins can match its trailing revenue growth rate of 12%, but countries like Brazil, China, and India are still seeing trucking operators building their fleets, while the move to natural gas could fuel demand not only for LNG/CNG engines, but also compression facilities and more equipment for the energy sector. Although I think the Street may be a little too optimistic on the free cash flow margin leverage Cummins can deliver, I'm increasingly thinking this is a good stock to own for the longer term.

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Investopedia: Navistar In Early Stages Of Turning It Around

I don't know if the nearly 60% move in Navistar (NYSE:NAV) over the past six months is due to Wall Street's confidence in Navistar's turnaround efforts or investors simply looking around for a stock that seemed a little undervalued. In any case, it seems harder to argue that investors aren't already factoring in a pretty solid recovery for this struggling truck builder. An industry recovery in 2014 could certainly help, but investors shouldn't underestimate the challenges in rebuilding customer confidence and regaining the market position of years past.

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Investopedia: Investors Already Thinking Recovery For Cummins

Seeing as it is no simple task to find a company with the right mix of good management, competitive products, and attractive long-term markets, I understand why investors are slow to give up on companies that feature these attributes. All the same, it looks like the Street has already looked past this lull in Cummins' (NYSE:CMI) business. Not only is the stock up about 15% over the past year and within 10% of its all-time high, but today's valuation already presumes a pretty solid future outlook with respect to growth.

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Seeking Alpha: Cummins Getting A Lot Of Benefit Of The Doubt

With the stock up almost 40% from its October 2012 lows and less than 10% from its 52-week high, it seems safe to say that investors are feeling pretty good about Cummins' (CMI) recovery prospects. Though I have little doubt that anything is changing in regards to the company's top-notch quality, I do wonder if investors are too quick to assume that emerging market growth is just going to go back to where it was. I would love to accumulate these shares at attractive prices, but today's valuation already assumes a pretty optimistic scenario.

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Cummins Getting A Lot Of Benefit Of The Doubt

Investopedia: Navistar Is Terrible Today, But That May Not Be Relevant

There was absolutely no reason to think that the fiscal fourth quarter was going to be a good one for truck builder Navistar (NYSE:NAV), and it certainly was not a good one. The real question for investors, though, is whether this company can hit its new product launch targets, streamline its manufacturing process and rebuild the share that management missteps destroyed over the past couple of years. This continues to look like a binary stock to me - if management can direct a real turnaround, the shares will thrive from here, but survival (and success) are far from assured.

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Investopedia: Westport Is Still All About Tomorrow

Whether it's truck and engine company executives like those at Navistar (NYSE:NAV) and Caterpillar (NYSE:CAT), environmentalists, or energy policy pundits, it seems like there's a broad agreement that the U.S. needs to do more to make use of natural gas as a vehicle fuel. With high-quality partners like Volvo (OTC:VOLVY) and Cummins (NYSE:CMI), Westport Innovations (Nasdaq:WPRT) continues to look like a promising play on that trend. That said, while these shares could indeed have substantial upside from here, the LNG/CNG engine market is still in its infancy and there are no guarantees that customers will go in the direction of Westport's technology.

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Investopedia: Should Oshkosh Investors Take Icahn's Money And Run?

Well-known investor Carl Icahn has been agitating for various changes at specialty commercial and defense truck manufacturer Oshkosh (NYSE:OSK) for some time now. On October 10, 2012 Mr. Icahn ratcheted things up a notch - making an offer to the company's board to take the company private for $32.50 per share in cash. Should investors push the board to cash out, or should they hope that the board rebuffs Icahn and continues on as an independent publicly-traded company?

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Seeking Alpha: Can Navistar Pull Itself Out Of The Ditch?

Arguably the only thing more remarkable than the share growth Navistar (NAV) saw in the first decade of this century has been how quickly it all went wrong when the company decided to break with the pack and pursue its own engine emissions technology. The company has seen since the error of its ways, and though the profitability of the "new" In-Cylinder Plus Technology and the agreement to use Cummins (CMI) engines are uncertain, the company can at least start thinking about getting back to the business of being a respectable truck builder.

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Can Navistar Pull Itself Out Of The Ditch?

Seeking Alpha: Does The Market Love Cummins Too Much?

For a market that got very nervous very quickly about industrial companies, particularly those with sizable emerging market exposure, Cummins (CMI) is actually faring quite well. Investors seemed encouraged by the company's recent quarterly report, as well as a big (albeit not totally unexpected) win with Navistar (NAV). The question I have is whether Cummins, for all of its great qualities as a company, is still a bit too popular for investors' long-term good.

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Does The Market Love Cummins Too Much?

Investopedia: Navistar Changes Gear With Its Engine Program

It looks like truck and engine manufacturer Navistar (NYSE:NAV) has finally bowed to the inevitable and is changing up its engine technology. While the company's press release reads as though this is a big leap forward, the reality is that management has struggled mightily with its existing advanced exhaust gas recirculation (EGR) technology and had little choice but to abandon an all-EGR approach in favor of urea-based after treatment. Although this switch is a necessary step for the company, it remains to be seen how much implementing this new approach (and getting EPA certification) is going to cost.

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http://stocks.investopedia.com/stock-analysis/2012/Navistar-Changes-Gear-With-Its-Engine-Program-NAV-CMI-CAT-DE0706.aspx

Investopedia: The Navistar Mess Gets Messier

It hasn't been easy to follow, or own, heavy-duty truck builder Navistar (NYSE:NAV) over the last four years. Not only has the company had to deal with the normal deep cyclicality of the heavy truck market and the big changes in the defense market, but also self-inflicted challenges brought about by breaking with Cummins (NYSE:CMI) and developing its own engine technology.

With the fiscal second quarter results in hand, it's pretty clear that we are not even close to a "steady state" with Navistar. Significant erosion in overseas markets has made investors nervous about the sector as a whole, but the company's ongoing warranty and Environmental Protection Agency (EPA) compliance issues continue to occupy management's time and unnerve customers.

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http://stocks.investopedia.com/stock-analysis/2012/The-Navistar-Mess-Gets-Messier-NAV-CMI-PCAR-ETN0611.aspx

Seeking Alpha: Cummins Is At The Top Of The Mountain; Where Can It Go Next?

The peculiar illogic of Wall Street sometimes means that you're better off buying companies with plenty of room for improvement, as opposed to those that run themselves with laudable efficiency. In the case of Cummins (CMI), it's fair to ask whether the company really has enough dry powder left to significantly surpass Wall Street expectations and drive a higher valuation. Although the emerging market growth story has ample room left to run, it's worth wondering if Cummins' core engine business in North America and Europe has already seen the best of times.

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Cummins Is At The Top Of The Mountain; Where Can It Go Next?