Is Navistar (NAV) Positioned Well to Rebound From The Slump?
Navistar NAV manufactures International brand commercial trucks, proprietary diesel engines, and IC Bus brand school and commercial buses. With the trucking industry being heavily cyclic, Navistar is bearing the brunt of weak macroeconomic conditions amid coronavirus woes. Shares of Navistar have fallen more than 17% in the last 6 months, wider than the broader industry’s decline.
Six-Month Price Performance
On Jun 4, the heavy machinery producer reported second-quarter fiscal 2020 results, delivering dismal year-over-year contributions across all segments. The Zacks Rank #3 (Hold) firm incurred a loss of 10 cents per share versus earnings of $1.06 per share in the prior-year period. Revenues also marked a 35.8% year-over-year plunge on lower volumes in the company’s core (class 6-8 trucks and buses in the United States and Canada) market due to the coronavirus outbreak.
The pandemic has rattled the truck manufacturer with factory closures, falling demand of vehicles and supply chain disruptions. Navistar scrapped the fiscal 2020 guidance as it expects the pandemic’s impact to strain the company’s operations in the upcoming period.
Declining freight demand and waning orders for Class 8 trucks are weighing on the firm. After reaching its peak in 2018, freight demand declined in 2019 and is expected to wane further. Similarly, used-truck pricing also weakened from the 2018 peak. Industry Class 8 orders pummeled around 70% on a year-over-year basis in 2019. Coronavirus-led sluggish economy and low demand are adding to the woes.
With declining freight demand in the second quarter of fiscal 2020, truck utilization and rates fell. With excess trucking capacity, new orders are declining as companies re-evaluate their needs in the wake of low demand. In fact, some deals have been put on the backburner or completely scrapped. In April, Navistar incurred Class 8 order cancellations of about 300 units (or 2.5%) of the backlog. Navistar’s backlog of Class 6-8 truck orders stood at around 18,000 units by the end of fiscal Q2, falling 12% from the end of fiscal Q1. Used truck volumes have been going down. Used truck pricing, a leading indicator of new truck orders, was down 20% year over year in the most recent quarter.
Moreover, the company’s stretched balance sheet is being a spoilsport. As of Apr 30, Navistar had cash and cash equivalents of $1.5 billion and its long-term debt was $4.9 billion. Navistar has been taking necessary cost-control actions to adjust its business to current market conditions, including compensation cuts and capex reductions. However, these actions are not likely to offer much respite unless the revenues pick up.
While the company still preserves its goals under the Navistar 4.0 strategy, 2020 is expected to be a tough year for it. The trucking industry’s demand is likely to remain weak. Navistar calls it a cyclical downturn.Weak consumer sentiments amid the pandemic will hurt the firm’s sales and earnings in the near future.Fed’s somber outlook regarding the U.S. economy along with concerns regarding the second wave of coronavirus infections is likely to weigh heavily on the auto industry. Navistar anticipates 2021 to be a better year, but does not expect sales and earnings to return to 2018 and 2019 levels by then. However, all depends on the state of the economy and the pace of recovery from coronavirus-induced crises.
