Navistar Beats Profit Estimates for Fifth Straight Quarter

September 06, 2018 by Alan Adler, @AlanAdler

Navistar International Corp. beat third quarter sales and earnings predictions, exceeding Wall Street’s expectations for the fifth straight quarter.

Strong demand for replacement trucks was a main contributor to earnings of $170 million in the May-June period of fiscal 2018 compared with $36 million last year. Earnings per share, excluding one-time items, were $1 per share, topping estimates of 90 cents for the Lisle, Illinois-based truck and bus manufacturer.

Revenue was $2.60 billion, up 18 percent from $2.21 billion, but slightly below analysts’ consensus of $2.67 billion.

“We think the market will remain strong in the fourth quarter and into 2019,” Navistar Chief Executive Troy Clarke told analysts on a conference call. “It’s just a great time to be in a truck business.”

The company raised its fiscal 2018 revenue forecast by $250 million to a range of $10.1 billion to $10.4 billion, from $9.75 billion to $10.25 billion. Navistar’s fiscal year ends November 30.

Truck and business orders in the third quarter rose 90 percent year over year. Navistar had year-over-year growth of 67 percent in Class 6-7 trucks, 18 percent in bus and 178 percent Class 8 heavy-duty. Only Class 8 severe service truck performance trailed, up 65 percent vs. 127 percent a year earlier.

Navistar’s share of heavy-duty orders jumped 18 percent in the quarter. That translated to 2.7 points of retail share, bringing its third quarter share to 15.7 percent. The performance of the new LT Series with the A26 engines led customers to reorder large quantities after gaining initial experience. Registrations of 13-liter LT trucks more than doubled in the first six months of the year. Its new medium-duty line is also selling well.

“Navistar began reinvesting in new trucks once the company course-corrected its engine strategy and partnered with Cummins for the new 15-liter engine,” said David Leiker, senior research analyst with Baird Equity Research. Baird has an “outperform” rating on Navistar stock. The company is regaining share after losing almost half its market share when it pursued a problematic engine emissions strategy following the start Phase I federal greenhouse gas standards in 2010.

Clarke forecast the industry’s U.S. and Canadian medium- and heavy-duty truck production would range between 385,000 to 415,000 units in 2019, pointing to U.S. economic growth and consumer confidence. Class 8 tractors would account for 255,000 to 285,000 of those trucks, he said.

Production backlogs stretch into the second quarter of 2019. The pipeline is so robust that some are questioning if these orders will be built, Clarke said.

Fleets place orders with more than one manufacturer and cancel those that take longer to get. Orders for dealer stock also could be canceled if the economy sours, or delivered later.

But Clarke said order cancellations have been stable for the past 18 months. “We expect to build the units in our backlog.”

Supplier disruptions led to some dropped orders in the quarter and others waiting for parts. Major supply chain issues have been resolved but it “remains really tight,” Clarke said. “The system is basically running without buffers and we continue to monitor the supply base very closely,” he said.

Navistar paid more for transportation due to parts shortages. Commodity prices rose, including 30 percent higher steel prices because of U.S. tariffs on imported steel. They were offset by lower warranty costs, which fell to 1.7 percent of revenue. That was the lowest percentage this decade and down from 2.4 percent in the same quarter a year ago, said Walter Borst, Navistar’s chief financial officer.

Navistar raised prices across its model lines from 1 percent to 3 percent in July, but customers won’t be affected until early 2019 because of the production backlog.

Clarke said Navistar’s Traton venture with German automaker Volkswagen is proceeding with more joint products like an electric school bus it is testing in California. Volkswagen holds a 17 percent stake in Navistar. It said in April it was open to buying majority ownership.

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2 Responses

  1. A

    Per Navistar’s website, the A26 engine is not by Cummins. It was based on MAN’s (also owned by VW) engine design.

    Reply
    • Jerry Hirsch
      Jerry Hirsch

      Correct. That was an editing error. It is not corrected. Thank you for bringing that to our attention.

      Reply

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