Navistar Heads in the Right Direction

Patience is normally a virtue, but when it comes to investing in deep cyclical stocks, it's an absolute necessity. Because of the boom-and-bust nature of their end markets, bottom-line results can swing from big profits to steep losses.

Consider Navistar(NAV Quote), for instance, which I covered in June. The stock of this maker of commercial trucks, school buses and midrange diesel engines gained significant ground last year. Shares more than doubled from their low of late 2002, reaching a high of nearly $52 in early 2004. But since then, Navistar has lost more than 30% of its value. Seven percent of that decline occurred just last Thursday, when the company released fiscal third-quarter results and held a conference call.

As earnings conference calls go, Navistar's certainly could have been better. During the call, it became apparent that not only was the quality of third-quarter earnings low, the company's new full-year guidance was higher only because of a number of nonoperating items.

Hope Shines

Although the pace of Navistar's earnings improvement may lag what many analysts had expected by this point, it's clear that the company is moving in the right direction. Even excluding some nonoperating benefits to earnings, such as those accruing to the company from the new Medicare Act, Navistar is still expected to earn well over $2 per share. That's a big swing from the loss of 50 cents it posted last year.

And assuming that demand for medium- and heavy-duty trucks continues to be strong in 2005, as is widely expected to be the case, Navistar's earnings could approach $4 next year. Now trading at a forward price-to-earnings ratio of just 8.8 times, Navistar's shares look cheap. Its long-term historical average P/E is more like 11. Once the market gains more confidence in the sustainability of the truck cycle and the upside in Navistar's earnings, the shares should move higher.