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Morningstar | As the U.S. Economy Powers Ahead, Navistar Captures Greater Market Share in 2Q; Maintaining FVE

With its refreshed product line aided by a strong North American economy, Navistar beat consensus estimates for both revenue and adjusted EPS in the second quarter. Revenue including financial services of $3.0 billion easily surpassed Street estimates of $2.7 billion. Adjusted EPS of $1.22, which excluded a $159 million EGR legal settlement, beat consensus of $0.88. More important was that Navistar increased market share sequentially in all its core markets, including an increase from 12.0% to 14.5% in North American Class 8 trucks. Also notable was that noncore chargeouts, which include Class 4 and 5 trucks, increased to 5,500 units from 2,300 in the second quarter last year. While we were impressed with Navistar’s quarterly performance, we remain cautious about Navistar’s long-term prospects and believe the shares are overvalued. We maintain our fair value estimate of $28.50.

Navistar increased second-quarter revenue 24% year over year, driven largely by its main truck segment. Despite a history of failed new product introductions, Navistar’s new focus on Class 4 through 7 trucks with a substantially refreshed product lineup appears to be resonating with customers. Given Navistar’s progress, which we believe is largely a result of winning new customers, management raised 2019 revenue guidance by $500 million to a midpoint of $11.5 billion.

Consistent with our larger body of research, Navistar stressed that fleets are more focused than ever on total cost of operation, which includes fuel economy. Therefore, Navistar benefits from having the newest product lineup that yields a 30% improvement in fuel economy over its trucks made 10 years ago. During the earnings call, management suggested that it was disproportionately winning business from the largest fleets. This, too, is consistent with our research into trucker sentiment, which revealed that smaller fleets are less inclined to purchase new Navistar trucks given previous disruptions caused by EGR engines.

Navistar’s pivot to manufacturing smaller trucks for both its own customers and for General Motors is a savvy way of avoiding the stigma from its previous EGR woes. Additionally, its strategy of providing a commercial product--its new CV series Class 4 and 5 trucks--to commercial customers arguably positions it take business away from Ford, which has a sizable work truck business. Navistar posits that demanding customers prefer to purchase trucks from a commercial truck manufacturer, which should provide better aftermarket support to improve vehicle uptime. While we have no direct evidence for this, we find Navistar’s marketing of this idea compelling. We have also taken a careful look at the CV series trucks and found them to be highly competitive offerings, which should help Navistar boost revenue and profitability going forward.